China’s central bank, The People’s Bank of China (PBOC), has set the yuan at 6.9666 against the US dollar in recent trades. This is a slight increase compared to the previous day’s closing rate of 6.9565. As the currency of the world’s second-largest economy, the yuan’s exchange rate is quite important due to the huge trade volumes it generates. Moreover, the yuan’s value has been a contentious issue for China and its trading partners globally, mainly the United States of America, leading to a series of trade wars and negotiations.
China’s Currency Control
The Chinese government has always maintained strict control over the yuan’s rate of conversion. And it is the PBOC that oversees currency control in China, setting the daily midpoint fix for the yuan. The PBOC then receives quotations from multiple inter-bank dealers and bases its decision on the previous day’s closing level. This is an important process as it determines the daily movement of the yuan’s exchange rate.
Onshore & Offshore Yuan
There are two types of yuan that are traded globally: the onshore yuan (CNY) and the offshore yuan (CNH). While both yen’s have the same currency symbol, CNY is only viable within mainland China, while CNH is used globally. Additionally, trading restrictions apply to CNY transactions, but that is not the case with CNH. This means the value of the CNY is more tightly controlled than the CNH, reflecting China’s efforts to regulate the currency on the mainland.
Control of the Yuan’s Exchange Rate
Historically, the value of the yuan was pegged to the US dollar, but that changed in 2005 when the peg was replaced with a managed floating rate against a basket of currencies. While this provided some flexibility, the PBOC still controls the exchange rate within specific restrictions, allowing the yuan to fluctuate against other currencies within a limited range.
China is considered a currency manipulator globally because the PBOC often intervenes in the market to maintain the yuan’s exchange rate stability. Specifically, with China being a dominant exporting nation, a weak yuan is favorable for its exporters, as it makes exports cheaper and more attractive in foreign markets. The opposite is true for a strong yuan; it makes exports more expensive but provides favorable terms for other import-based sectors in the economy.
The Relationship with the US and the Trade War
The value of the yuan has become a contentious issue between China and the United States. Before the 2016 presidential election, former President Donald Trump promised to label China as a currency manipulator on his first day in office, a promise he kept when he came into power. The US is concerned that China artificially holds down the yuan against the US dollar, making Chinese goods cheaper in the US than American goods in China. Consequently, the US has imposed tariffs on Chinese goods under the argument that such action would level the playing field between the two countries.
The current administration under President Joe Biden has also maintained strict measures against China. During the presidential debates, President Biden stated that it would maintain strict oversight of China’s economic policies, particularly with regards to its currency.
Conclusion
In recent trading, China’s central bank increased the value of the yuan compared to previous trade sessions. The yuan’s exchange rate is an essential tool for China and its trading partners, especially the US. The PBOC controls the yuan’s value within a specific range, making it a contentious issue between the two countries in recent years. However, with the G20 Summit set to take place later in the year, it remains to be seen how the yuan’s exchange rate will impact global trade and negotiations moving forward.
