China switched from a strictly fixed exchange rate in July So its currency is now more flexible but is still managed with a close eye. China's exporters receive dollars when they ship goods to the U. They deposit them into their local banks. The bank pays them renminbi in return, which they use to pay their workers and local suppliers.
The local banks then transfer dollars to the central bank. It uses the dollars to purchase U. Treasury bonds, which pay interest. As a result, China has become one of the largest foreign holders of U. If the dollar rises too far above the peg, the bank will sell Treasurys on the secondary market.
By adding to the supply of Treasurys for sale in the market, their value drops, along with the value of the dollar. Any country that keeps its currency artificially low to boost cheap exports can be accused of currency manipulation.
Currency manipulation is difficult to prove. A fixed exchange rate , by its very nature, exposes a country to accusations of currency manipulation. To make its case, the accusing country must prove that the accused kept its currency low simply to increase exports. In August , the U. Treasury Department, China has a history of undervaluing its currency to gain an unfair competitive advantage.
Since , when the yuan reached an year high, China has been lowering the value of its currency. There are many reasons for that. As a result, the yuan was overvalued compared with other trading partners not pegged to the dollar.
The IMF required the yuan to be more driven by market forces. As China relaxed controls, the yuan experienced greater market volatility. It fell, indicating that the market thought the yuan was overvalued. It might have been trying to offset the rising cost of tariffs imposed by President Trump's trade war. Later that year, the U. Low import prices also minimize the threat of inflation.
Their Chinese partners wanted silver, preferably these large European-style silver coins. China, as a result, was the destination of much of the silver coming from the mines of Spanish-America. The dollar of choice among Chinese businessmen was for a long time the Spanish Colonial Mexican dollar.
Later it was the so-called Eagle Dollar produced by independent Mexico. In the second half of the 19th Century major trading nations starting producing their own "trade dollars". The UK produced a trade dollar, and so did the US, as discerning Chinese traders demanded higher-quality silver than the metal used in regular US dollars.
China's first domestically produced machine-struck dollar coin, or yuan, was minted in Guangdong province in The Chinese phrase for the US dollar is "mei yuan", the American yuan. The Japanese and Korean names for their currencies, the yen and the won respectively, are derived from the same Chinese yuan character. The Chinese name for the Japanese yen is the "ri yuan". Nobel-prize-winning economist Paul Krugman, writing in the New York Times in October , noted that no-one seemed to mind if you talked about the pound's value, but talking about the yuan's value would sometimes draw disapproval.
As it happens, Chinese people rarely talk about renminbi or yuan. The word they use is "kuai", which literally means "piece", and is the word used historically for coins made of silver or copper.
Also common is "10 kuai qian", literally "10 pieces of money". But it is all renminbi. This is similar to the pound sterling, which is the name of the British currency, while the price of a pint of beer in a London pub would be stated just in pounds. These developments have led to intense speculation that the renminbi will soon become one of the major international currencies. Eventually, the internationalization of the renminbi will enable the PRC to be an alternative supplier of safe assets to the rest of the world in which firms, households, and central banks can park their savings, where they will later be available in case of a need for more liquid funding.
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