Question

What is currency manipulation and how do governments do it? Is China a currency manipulator? What does China gain by manipulating its currency? Is it a critical issue in the global economic dynamics? There are conflicting reports on the subject. Whats your opinion?

Answer 1

Currency manipulation is a tactic used by some of America's largest trading partners 'governments and central banks to deliberately lower the value of their currency (in effect reducing their export costs) to obtain an unfair competitive advantage.

Simply explained, a nation is selling its own currency to weaken its currency and purchasing foreign currency-normally US dollars. The consequence is that, according to the laws of supply and demand, the exploiting country decreases demand for its own currency while growing demand for foreign currencies.

By loosely pegging the value of its currency, the yuan, to the dollar, China directly affects the US dollar. China's central bank uses a modified version of a conventional fixed exchange rate, which varies from the U.S. and many other countries 'floating exchange rate. The Peoples Bank of China controls the interest of the yuan. It keeps it fixed to a currency basket which represents its trading partners. The basket is weighted against the dollar as China's main trading partner is the United States. It holds the value of the yuan against the currency basket within a range of 2 per cent.

China's currency is able to regulate its export prices. It needs to make sure that its products are priced fairly when sold in the U.S. Every country wants to do this but few people have the potential of China to do it so well. The command economy of China enables it to monitor the central bank and many enterprises. As a consequence, China's economy is controlled by the Communist Party. The U.S. government controls exchange rates, rather than enforcing them.

Both IMF and WTO members are forbidden from manipulating currency to achieve an unfair competitive advantage, but the prohibitions are lacking in teeth. The solution is simple: In all future trade deals, strict and enforceable currency rules must be included.
If such provisions are included, any country found to be in violation will forfeit the trade agreement's benefits. This will firmly discourage manipulating the currency and uphold the values of free trade and free market.