RTTue, 06 Aug 2019 13:03 UTC
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On Monday, the
United States government officially labeled China a 'currency manipulator.' But all countries manage their own national currencies. Here's a quick explainer of what this means.
How does a country control currency? Government central banks control currency by regularly setting interest rates, through issuing new bank notes, and managing foreign currency reserves. National regulators also manage currencies on the open market to
weaken or strengthen the exchange rate if the market price rises or falls too quickly.
Which countries manipulate their currency?In effect,
all countries manipulate their currencies in one way or another. Recent examples include Quantitative Easing programs by the US, the European Union, Japan, and others, in the years following the 2008 financial crisis.
Hundreds of billions in new currencies have been issued to prop up local stock markets and buy government debt. Why is that currency manipulation?
The answer is devaluation. The more money you print, the less it is worth.
How does a country manipulate currency?Simply explained,
in order to weaken its currency, a country sells its own currency and buys foreign currency - usually euros or US dollars. Following the laws of supply and demand, the result is that the manipulating country reduces the demand for its own currency while increasing the demand for foreign currencies.
Why would a country want to weaken its currency?A country may want to weaken its currency
in order to manufacture domestic goods more cheaply and make them more competitive on the global market. The US has accused China of doing just that in response to recent tariff hikes on Chinese goods.
A weaker yuan helps Chinese exporters deal with higher tariffs. The downside is that imported goods become more expensive for Chinese consumers.
How does China manipulate its currency, according to the US?The Chinese currency, called the renminbi or the yuan, is what the US calls
a policy currency. So according to Washington, this means that, unlike the US dollar, which rises and falls in value in free market trading,
the yuan's value against the dollar is set by the People's Bank of China, an arm of the Chinese government.
Comment: And this from
RT: US labeling China 'currency manipulator' will shake global financial markets warns China's central bank
The People's Bank of China warned on Tuesday that the US decision to designate Beijing a 'currency manipulator' harms international rules and will have tremendous consequences for global markets. "This will not only seriously undermine the international financial order, but also trigger financial market turmoil," the Chinese central bank said in a statement, as cited by Xinhua.
On Monday, Washington escalated the trade war with Beijing by accusing China of devaluating the yuan, after US stocks saw their biggest drop in a year.
The yuan to fell below its 7-to-1 ratio with the US dollar for the first time in a decade Monday, after the latest tariff threats from Washington. A weaker currency helps Chinese exporters deal with higher tariffs. [See above]
US President Donald Trump accused Beijing of deliberate manipulation of its currency. Shortly after Trump's furious tweets, the US Treasury officially labeled China a "currency manipulator." The move triggers a set of measures mandated under the Omnibus Trade and Competitiveness Act of 1988, including a complaint to the International Monetary Fund (IMF).
The People's Bank of China refuted Washington's accusations on Tuesday, calling the US' actions "unilateral" and "protectionist." It argued that Beijing has not and will not weaponize the yuan in the trade conflict with Washington.
The latest clash between Washington and Beijing triggered a selloff on the global stock markets. The Dow Jones Industrial Average plummeted almost 2.9 percent, or 767.27 points, on Monday. The S&P 500 suffered similar losses, dropping 2.98 percent. The Nasdaq Composite closed down 3.5 percent, wiping out $162 billion in value of Big Tech stocks. It was the worst percentage drop for all three main US indices this year.
Asian markets extended losses on Tuesday. China's Shanghai composite declined 1.56 percent to finish at 2,777.56, while the Shenzhen composite tumbled 1.39 percent. Hong Kong's Hang Seng shed 0.67 percent to 25,976.24 points, while Japan's Nikkei declined 0.65 percent, closing at 20,585.31 points.
Comment: And this from RT: US labeling China 'currency manipulator' will shake global financial markets warns China's central bank