Question

Which factors are thought to influence the development of the Yuan/$ exchange rate in the near future?

How are these factors related to exchange rate theories?

2. When and how can countries be labeled currency manipulators?

Does China currently fit this criteria?

Answer 1

1. Factors that are thought to influence the development of the yuan/ $ exchange rate is the export. Devaluing the currency will help in boosting export. After a series of weakening output growth, the authorities have come intense pressure internally to deal with the slowdown with a dramatic shift in policy.

These factors are related to exchange rate theories as devaluing currency indeed helps in boosting export. This is because value of a currency is relative in nature. As Devaluation means that the value of the currency has dropped relative to other currency. so, in this case if the Chinese yuan devalues (relative to the dollar) then it costs less dollars to buy the equivalent amount of yuan, so the yuan is cheaper. It means that a Sofa which costs 60 yuan is now cheaper to those who have dollars and change their dollars to yuan to compensate for it. Note that the price of the Sofa didn't change (it's still 60 yuan), but because of the devaluation, the Sofa is cheaper to those who buy it with dollars. Thus, the TV manufacturer will likely get more demand from international buyers who have dollars in hand - resulting in increased exports - as the Sofas are now cheaper for those buyers, and generally when a good becomes cheaper there's more demand for it.

2. In 2015, Congress passed the "Trade Facilitation and Trade Enforcement Act". This Act requires that the Treasury Department “undertake an advanced examination of exchange rates and externally faced policies for each major trading partner that has: (1) a notable bilateral trade surplus with the United States, (2) a material current account surplus, and (3) engaged in tenacious one-sided intervention in the foreign exchange market.” Those countries meeting these definitions will be termed as Currency Manipulator. China was not labeled as Currency manipulators but fitted this criterion up to some extent