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China’s national currency is the RMB (renminbi) 人民币, one unit of chinese RMB is one Yuan 元. RMB literally means “money of people”. For the last few years China has maintained the value of their currency at just 7 Chinese Yuan to 1$.The value of a currency depends on how much or little it is used. A products price depends on its demand, so does the price of a currency. If the demand for Chinese currency is high, it becomes expensive, if it is low it drops.

Economic law of supply and demand :

If Chinese money is less valuable than other currencies, people will buy Chinese money to buy Chinese goods and start businesses in China because it is cheaper than doing it in US. Because Chinese money is growing in demand, the price goes up and the Chinese currency becomes expensive. As a result people buy less goods from China as it becomes expensive until the price of the Yuan drops again. But this natural process does not happen because China is preventing the Yuan from becoming expensive as more and more people are asking for it to export Chinese goods. This way the export never stops because it does not become expensive for foreign investors despite Chinese currency being in high demand.

Currency Manipulation :

China is keeping its economy competitive and growing by deliberately lowering the value of RMB. In simple words, China is creating an unfair advantage in the export market and preventing other countries from competing.

The People’s Bank of China (PBoC) is China’s central bank. It exchanges Dollars for Yuan at a certain exchange rate. To achieve this, the PBoC must keep a huge dollar supply. By buying the US-Dollar, China is raising the demand for the Dollar while the Yuan is dropping. China spend more than $500 billion to purchase foreign currencies. To prevent the Yuan from dropping too low, the PBoC lowers the amount of money in its own country by applying money restricting policies and works against the side effects that it creates.

This also creates a disadvantage. Since other currencies become relatively expensive, Chinese people will not import goods outside of China. A trade-off which China is willing to accept.

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