The U.S. government's decision to label China a currency manipulator after ...
TOKYO/SHANGHAI - The U.S. government’s decision to label China a currency manipulator after Beijing allowed the yuan to weaken past the symbolic 7-per-dollar level has raised questions about how tightly managed the currency is, and its true value.The following explains the working of China’s currency regime.The People’s Bank of China allows the yuan to trade in a 2% range around a mid-point it fixes against the dollar each day.
China also maintains heavy capital controls, strict foreign investment quotas and a complex system that manages onshore trading and influences offshore yuan activity, leaving the true value of the yuan open to interpretation.Global financial markets tend to focus on the yuan’s exchange rate to the U.S. dollar, and it was effectively pegged to the greenback for a number of years. It has appreciated more than 17% since being revalued in 2005.
HOW HAS THE CFETS BASKET BEHAVED IN THE PAST FEW YEARS? In late 2015, China unveiled a new trade-weighted CFETS yuan index, saying the yuan’s value should better reflect its trade and investment with multiple countries, not just the United States.Since 2017, the number of the currencies in the basket is 24 and the dollar’s weight is 22.4%. Analysts say keeping the CFETS index rangebound will ensure China isn’t disadvantaged on exchange rates versus its trading partners.
Previously, China burnt through $1 trillion of foreign exchange reserves to fight against depreciation expectations following a sharp one-off devaluation in 2015. It has shored up restrictions on capital outflows since then, while encouraging more inflows from foreign investors into Chinese stocks and bonds.
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