The Chinese Yuan
Money is a form of exchange used in
countries globally, and it comes in different types depending on the specific
nations that it is located. In fact, it is arguable that one of the reasons why
people work is to earn money to help them purchase their basic and luxury
requirements. This research thus focuses on the Chinese Yuan as a form of
exchange that is gradually growing to become an international currency.
Currency
Currency refers to any form of money
especially when it used as a means of exchange. Over the years, the currency
has manifested itself in many ways starting from commodity money to the present
paper and paperless currency. “In the ancient times, people exchanged goods for
other goods in a system known as barter trade” (Beattie).
However, the means of exchange had its technicalities because sometimes it was
difficult to determine the exact value of the goods being exchanged. Besides,
the indivisibility of some commodities made it difficult to conduct trade. “Consequently,
the people began using other standardized forms of exchange, such a copper and
silver as a means of exchange, which were referred to as commodity currencies”
(Beattie). Other examples
of money included cowrie shells, animal skin, and knives.
“By the 7th century,
coins had emerged as an exchange medium and were coated with silver and gold” (Beattie). The Chinese later
became the pioneers of the first paperless money that was convenient because of
its ease to handle. The use of paper money then spread to the rest of the world,
and with the development of the banking sector, the flow of cash was regulated.
“Currently, nations have ventured into other forms of money such as the use of
paperless currency” (Beattie).
The latest development in the currency world is the use of Bitcoin which is a cryptocurrency.
Currency
Valuation
Various approaches are applied to value
money. “However, the most significant one is the law of demand and supply of
money “(Menkhoff et al. 6).
It suggests that the lower the amount of currency in circulation, the higher
the value of that currency. Therefore, the value of a given currency rises as
its demand increases. The supply and demand for money can be affected by
different situations in the economy. “Firstly, the bank lending rates influence
people’s borrowing behavior” (Menkhoff et al. 8).
For instance, when the lending rates are high, the frequency of borrowing loans
will be lower hence reducing the amount of money in circulation. Besides,
political events such as election can affect the amount of money supply since
they facilitate injection of currency into the economy.
“Currency
exchange rates are also used to determine the value of money” (Menkhoff et al. 9). A nation maintains the
value of its currency by holding a steady amount of foreign reserves in its
treasury. For the ease of trading with a particular country, it is advisable
that the state maintains a higher amount of foreign reserves of the former so
that exports to that country are cheaper; hence increasing the demand for
products. It is easier to determine the value of money by comparing it with
another currency. For many years, the US dollar has been used a standard
measure of the value of money from other nations due to its stability in value.
“The number of treasury bills and bonds
held can also determine the value of money” (Menkhoff
et al. 12). For instance, foreign nations purchase the US
treasury bills and bonds that mature over a given period. After maturity, the
bonds can then be sold at a value higher than the original including the interest
accrued over that time. Therefore, the more the US treasury bills and bonds are
demanded, the higher the value of the dollar. On the other hand, other nations
use the bills and bonds to regulate the money supply in their economies hence
ensuring stability in the value of their currencies.
Forex
“Forex refers to a decentralized global
market where all world currencies are traded” (“Let’s
Get to Know Forex,” 5). The participants in the market are
optimistic about profit by predicting the value of one currency over the other.
It is easy to trade currencies in this market because of its large liquidity. Hence,
two currencies are always involved in any particular trade. Individuals that buy a currency at a lower
rate to later sell it at a higher price are normally referred to as bulls. “On
the other hand, those people that sell their currencies at a higher price to
later repurchase them at a lower price are known as bearers” (“Let’s Get to Know Forex,” 4).
Unlike the stock exchange market, the Forex market is characterized by limited
restriction and trading is done at any time depending on the trader’s preference.
Forex trading solely relies on the value of currencies which rises and falls
periodically. These currency fluctuations are determined by current events such
as political news, economic situation of a given country and the exchange rate
variations.
Appreciation
and Depreciation
Appreciation refers to the rise in the
value of one currency in respect to other currencies (“Currency Appreciation and Depreciation”).
On the other hand, depreciation is the fall of a given currency with respect to
another currency (“Currency Appreciation
and Depreciation”). The rise or fall of currency is
dependent on several factors, but the most notable one is the demand and supply
of money in the economy. For instance, an increase in money supply will cause
depreciation the value of that currency. Contrary, increased demand for money
in an economy will appreciate its value.
Effects
of Appreciation of Currency to an Economy
“An appreciation in the value of currency
makes it cheaper to import goods as compared to exporting them. This is because
the cost of exports becomes expensive as compared to the value of imports” (“Currency Appreciation and Depreciation”).
Appreciation can help ease the burden of inflation since people will tend to
import more commodities than they export them thereby injecting money out of an
economy. However, appreciation of value in a country can lower the ease of
conducting trade with other countries due to the high prices of their
commodities; hence creating a balance of payment deficit. Therefore, continued
appreciation of currency reduces the number of sales from exports thus lowering
the level of job creation in that country.
Effects
of Depreciation of Currency to an Economy
“Depreciation in currency value makes it
easier to export goods as compared to importing them due to the falling of the
exchange rates” (“Currency Appreciation
and Depreciation”). In other words, the value of exports is
cheaper when compared to the value of imports. The overall effect of such an
outcome is to increase the competitiveness of the exports from a given country
over other countries. “Also, as a result of the increased sales, more jobs will
be created hence lowering the level of employment in the nation” (“Currency Appreciation and Depreciation”).
However, depreciation of the currency in a given country is likely to cause
inflation because more money is injected into the economy from the increased
imports by other nations.
Examples
of Extreme Cases of Appreciation and Depreciation
Whereas the cases of extreme appreciation
of currency are rare, several scenarios of countries that have experienced
severe currency devaluation are multiple. The most recent example is the
Zimbabwean dollar that depreciated significantly. The nation suffered hyperinflation
because its production capacity was destroyed by civil war and confiscation of
land owned by the white settlers. The case was extremely severe to the extent
that the Zimbabwean government stopped filling inflation statistics. Other
countries that have experienced similar instances of a devaluation of currency
include Guinea, Sao Tome and Principe, Indonesia, Iran, and Vietnam.
Basis
Information on China and its Economy
“China is located in Asia and has the
highest population of people in the world. The country is said to possess the
second largest economy in the globally” (Morrisson,
5).
However, the standards of living among the people in the country are still low.
This is attributed to the amount of minimum wage paid to workers in that
country as compared to other workers in the developed countries. Also, due to
its vast population, the nation is said to have the most extensive consumer
market hence many foreign firms and businesses compete to exploit the market. “By
2010, China had become the world leading manufacturer overtaking the U.S.” (Morrisson 6). Besides, the country
has continued to increase the manufacturing leadership gap.
The
public sector controls most of China’s economy as compared to other world
leading economy where the private sectors thrive. “This is attributed to the
massive dedication by its government that spends a lot to improve the industry”
(Morrisson 8).
Therefore, the rise of the Chinese economy as a world leader is because of its
increased balance of payment surplus. That is, its value of manufacturing
exports is higher compared to the cost of commodities imported into the
country.
“As a result of its increased economic
growth, China has increased bilateral trade with the U.S.” (Morrisson 10). In fact, the country is considered the second-
largest trading partner of the U.S. Several U.S. based companies have
established their operations in China mostly to take advantage of the highly
available cheap labor. However, as the Chinese economy grows, various concerns
have been raised over the effect it would have on the U.S. economy. “Some
policymakers in the U.S. have claimed that China uses unfair trading practices
to take over the market” (Morrisson 15).
For instance, it does not punish infringement of patent rights and extends vast
amounts of subsidies to local producers.
The
Yuan
“The Yuan is the national currency of
China. Locally, it is known as the Renminbi” (Amadeo).
Over the years, the money has evolved from simple coins with a hole in the
middle to the modern day Chinese Yuan. It is significant to note that the
Chinese were the first people to introduce paper money. Also important is the
fact that the contemporary Yuan was first injected into the economy after the
end of the civil war between the communists and the nationalists.
“The role of the Yuan has increased
internationally because of the weaknesses and the vulnerabilities of the
current world currencies, improved access to Chinese trading and investment,
and the excellent progress of financial reform in China” (Amadeo). As a result, even the number of
bilateral currency trades with the Yuan has increased in the Forex markets. Due
to the increased shortcomings of the current global financial system, there has
been debate over the need to replace the dollar as the primary foreign reserve
currency. Many suggestions on the best denomination to replace it have been
brought forward. One of these currencies is the Yuan. However, issues have been
raised over the money. “Firstly, the Chinese market is dominated by the banking
sector while the bond market is relatively low” (Amadeo).
Therefore, for the Yuan to gain a global status, the bond market has to
increase in size and become relatively liquid to enable investment. Also, the
exchange rate of the Yuan against the dollar is not flexible as the government
controls most of the activities.
Valuation
of the Yuan
The Chinese government undervalues the
Yuan to make it easier to trade with other countries. Lately, they have engaged
in currency manipulation that involves the acquisition of vast amounts of
foreign reserves. “It is estimated that in recent years, China has spent over
500million dollars to purchase foreign reserves” (“How
does China manipulate its currency?”). The overall effect of
the move in is to decrease the value of the Yuan. As a result of the surplus
trading activities in the Chinese market, the demand for the Yuan increases and
hence there is a relative increase in its value. “Therefore, the China
undervalues its currency to avoid the effects of having a strong currency” (“How
does China manipulate its currency?”). For example, a strong
currency will make exports expensive hence lowering their trading activities.
“To keep the value of the Yuan weaker than
the dollar, China periodically purchases enormous amounts of the U.S. Dollar as
a foreign reserve” (“How does China manipulate its currency?”).
This move is meant to increase the demand for the Dollar in China as a trading
currency. However, an influx of more dollars into the Chinese economy may
create a surplus in money supply in the economy. “To mitigate this problem,
China sells government bonds of equivalent amounts to their investors to
collect the excess money in supply” (“How does China manipulate
its currency?”). This move helps stabilize the value of both the
Yuan and the Dollar and ultimately increasing the trading activities in the
country.
Difference
in Valuation between the Yuan and the Dollar
“Unlike the Yuan, the dollar’s value is
determined by market forces such as the exchange rates” (Amadeo). The more the demand for the U.S.
dollar, the higher its value rises. For this reasons, many countries compare
the value of their national currencies with that of the U.S. dollar to
determine its price. “The rates of exchange of the dollar are determined by the
bank interest rates, the country’s economic condition and its level of debt” (Amadeo). The government controls the
Chinese Forex markets to facilitate manipulation of their currency to an
advantage. Unlike other financial markets in the developed countries, it has
implemented strict restrictions and regulations in its Forex markets in a bid
to achieve currency stability.
“The
U.S. government also uses treasury bills and bonds to value its currency” (Amadeo). The more the demand for treasury
bills and bonds, the higher the value of the dollar increases. Investors pay
more or less than the face value to acquire these treasury notes. When the
demand for the dollar is high, it implies that the investors purchased it a
price higher than its face value. “On the other hand, when the demand is low,
it means that the investors bought the bills an amount lesser than their face
value” (Amadeo).
Therefore the U.S. seeks to raise the value of its treasury bills. On the
contrary, the Chinese government aims to lower the value of its currency over
the U.S. dollar by purchasing more of their treasury bills and bonds. This
results in the creation of more demand for the U.S. dollar relative to that of
the Yuan implying that they seek to undervalue the currency to their advantage.
It is debatable to assume that it was
unfair for China to undervalue its currency with respect to the U.S. dollar
intentionally. This is because an increase in the value of the dollar makes
exports from the U.S. relatively expensive as compared to exporting from China.
Therefore, the Chinese seek to increase its trading activities by lowering the
value of its currency while on the other hand increasing the demand for the
dollar. Besides, by undervaluing its currency, the Chinese benefit from an
unfair export advantage which ultimately increases the trade deficits of the
U.S. to China.
Reasons
that Enable China to undervalue its Currency
“China can undervalue its currency because
of its ability to acquire large amounts of foreign currency reserves” (“How
does China manipulate its currency?”). As a result of rapid
economic growth in the country, it has succeeded to increase its purchasing
power hence its ability to acquire more of the U.S. dollars. Besides, there are
no restrictions on the number of foreign currency reserves that one country can
hold. “The ability of the Chinese government to undervalue its currency also
originates from the strict restrictions that it has put in its financial
markets” (“How does China manipulate its currency?”).
The government practically controls the manner in which currencies are traded
in the Forex markets. The essence of this move is to maintain the stability of
the money while at the same time increasing trading activities in the country.
“Unlike the U.S. dollar or the Euro that are
free-floating, which means their value is determined the market forces of
demand and supply, the Chinese Yuan experiences managed floating” (“China’s Foreign Exchange Controls”).
This is where a government controls the value of the currency by imposing
particular policies. The use of restrictions also goes a long way to enable
China to undervalue its currency. Some of the restrictions include putting a
restriction on the number of dollars that a person can trade at a given
time. “Also, they have imposed a fixed
rate of exchange through the central bank, and increased the amount of
paperwork and approvals that must be sought before completing a foreign
currency exchange trade” (“China’s Foreign
Exchange Controls”). This is meant to discourage excessive
foreign currency trading to maintain the stability of the local currency.
Effects
of China’s Actions on the World Economy
Various concerns have been raised by other
major world economies over China’s devaluation of its currency. The U.S. is the
most outspoken and blames China for its economic woes. This is because the
country is one of the biggest trading partners of the U.S. By devaluing their
currency, the number of exports to the U.S. becomes more compared to its
imports. “The effect is that as a result of cheaper commodities from China, the
local products cannot efficiently compete hence losing revenue” (Morrisson 13). Besides, the effect of
reduced exports is to increase the balance of payment deficits to the U.S. and
a relative increase in unemployment due to a slow rate of economic progress.
“Since the U.S. dollar is the primary
foreign reserve currency, it implies that any variation to it affects most
countries globally” (Morrisson 15).
China can alter the value of the U.S. dollar because it holds a substantial
amount of the U.S. Treasuries. Therefore, by undervaluing its currency, it
created more demand for the dollar hence raising its value. An increase of the
value of the currency implies that trading with countries that use the dollar
will be relatively expensive due to the increase in currency exchange rates. Besides,
an increase in the dollar value implies that the value of other foreign
currencies will drop relative to that of the dollar. Therefore, they would
require much more of their local currencies to conduct international trading. “In
the short run, the level of economic activities in these nations will drop
significantly due to the inability to access cheaper inputs” (Morrisson 19). On the other hand,
world economies will be affected in the long run by increased rates of
unemployment, slow economic progress, and reduced standards of living.
Effects
of Currency Valuation on China
The ability of China to value its
currency gives it an advantage because, depending on the global markets trend,
it can either appreciate or devalue the money to its benefit. “The fact that
China devalued its currency by the acquisition of more U.S. Treasuries
increased the demand for the U.S. dollar” (Morrisson
28).
It succeeded in making the value of its exports cheaper when compared to its
imports. Consequently, more trading and investment activities increased in the
country due to access to cheap labor and reasonable prices of goods and
services.
“China
is a manufacturing-based country” (Morrisson
32).
Therefore, by having the ability to value its currency, it can attract buyers
by availing the products affordable prices for the local and international
buyers. As a result, it boosts the economy by increasing employment
opportunities which ultimately improves the standards of living of its people.
However, as much as they undervalue their
currency, China is also aware of the need to keep it at an optimum level such
that its value does not fall too low. This is because even if the prices of
commodities may be low, the local people may not get value for the Yuan since
it cannot purchase much. “Therefore, to avoid risks of capital fight whereby its
citizens opt to invest out of the country, the Central Bank of China allows the
Yuan to appreciate from time to time” (Morrisson
34).
China
Devaluing its Currency and its Effects on the U.S. Economy
“In
September 2015, the Central Bank of China devalued its currency by three
percent of its value” (Morrisson 43).
The Yuan that was previously appreciating in value due to the improving
economic situation in the country fell short of its original value as a result
of the devaluation. “While some experts claimed that the moved was geared
towards increasing the number of exports, some argued that it was part of their
grand plan to become more market-oriented” (Morrisson
44).
Some of the other tools used before to achieve their goal included tightening
regulations in the financial markets and cutting interest rates.
Another
reason for devaluing its currency was because China wanted an inclusion into
the International Monetary Fund (IMF) special drawing rights basket of currency
reserves. “The IMF uses these reserves to buy local currencies in Forex markets
in a bid to regulate the exchange rates” (Morrisson
47).
Previously, China had been rejected by the IMF because they considered that the
Yuan could not be used freely.
“The
devaluation of the Yuan had severe consequences on the U.S. economy because it
increased the value of the dollar” (Morrisson
49).
Therefore, exports from the U.S. were relatively expensive as compared to the
imports. A stronger dollar implied that purchasing commodities was relatively
costly hence more people opted to acquire the same goods at a cheaper price
form China. “The overall effect was that the economy of the U.S. declined due
to limited foreign income hence reduced development and job creation” (Morrisson 50). Besides, the balance
of payment deficits of the country to China increased tremendously.
In
conclusion, it is evident that the value of a country’s currency has a direct
impact on the progress of its economy. Also, whereas some countries have the
opportunity to alter their currencies to take advantage of the prevailing
international market trends, some nations rely solely on the market forces of
demand and supply to value their money. Therefore, it is crucial that
governments do not manipulate their currency to gain an unfair advantage over
other nations because, in some instances, it would cause adverse economic
problems to other countries.
Works Cited
Amadeo,
K. “China's Currency: The Yuan or Renminbi.” (2017). Retrieved from https://www.thebalance.com/china-s-currency-the-yuan-or-renmimbi-3305906
Beattie,
A. “The History of Money: From Barter to Banknotes.” (2015). Retrieved from https://www.investopedia.com/articles/07/roots_of_money.asp
“China’s
Foreign Exchange Controls.” Maxxelli Consulting. (2017). Retrieved from http://www.maxxelli-consulting.com/chinas-foreign-exchange-controls/
“Currency
Appreciation and Depreciation.” Investopedia. (2017). Retrieved from https://study.com/academy/lesson/currency-appreciation-depreciation-effects-of- exchange-rate-changes.html
“How does China manipulate
its currency?” YouTube. (2015). Retrieved from
https://www.youtube.com/watch?v=Qy1V7tWpTGY
“Let’s
Get to Know Forex.” An Introduction to Trading Currencies. (2015): 3-28.
Retrieved from http://www.forex.com/pdf/lets-get-to-know- forex.pdf
Menkhoff,
L., Sarno, L., Schmeling, M., & Schrimpf, A. Currency Value. (2016): 2-53.
Morrisson,
W. M. China’s Economic Rise: History,
Trends, Challenges, and Implications for the United
States. Congressional Research Service. (2017): 5-50
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