Five Facts Currency Devaluations

Five Facts Currency Devaluations

President Trump fulfilled a campaign promise when his administration declared China a “currency manipulator.” This designation came after Beijing allowed the country’s currency, the yuan, to weaken following an announcement that the U.S. would impose 10 percent tariffs on $300 billion worth of Chinese goods. According to the BBC, the U.S. has not designated any country a currency manipulator since the Clinton administration named China one in 1994.Here are five facts on why China chose to devalue its currency and what that means for the global economy.

1. Oftentimes, countries will deliberately devalue their currencies to create artificial demand for goods they produce. As The Hindu reports, increasing the number of yuan in the global economy will encourage foreigners, including Americans, to buy more Chinese goods. This strategy can be especially impactful when a country is experiencing an economic slowdown, as China is right now.

2. China was able to devalue its currency by letting the yuan drop to a rate of 7 per dollar, its lowest value since 2008, according to National Public Radio (NPR). NPR notes that each morning the country’s central bank issues a proclamation on what the foreign exchange rate for the yuan will be. For the first time since 2016, the country is no longer inflating the currency’s value.

3. According to Vox, China has long been known as a currency manipulator on the international stage. Unlike other modern capitalist economies, Vox explains, Beijing controls the country’s exchange rate. For years, the government kept the currency artificially cheap in to help foreigners buy Chinese goods more cheaply and support its growing factory-based economy. In turn, the country was able to become an industrial powerhouse. In the past, both Democrats and Republicans have urged giving the country this designation.

4. The 2015 Trade Enforcement Act outlines three criteria for what makes a country a currency manipulator: an annual bilaterial surplus of $20 billion with the U.S., a large enough overall current account surplus, and “persistent, one-sided intervention” in the foreign exchange market to depreciate its currency. Between 2003 and 2013, China fulfilled all three of these criteria to unequivocally be considered a currency manipulator; the country depreciated its own currency by buying billions of dollars and making the U.S. currency more expensive relative to the yuan, according to NPR.

5. Now that China has officially been designated a currency manipulator, the U.S. has said that Secretary of the Treasury Steven Mnuchin will work with the International Monetary Fund (IMF) to rectify this imbalance and ensure the country does not have an unfair advantage in the global economy. However, the IMF recently determined that China's currency has been fairly valued over the past year; it has depreciated just 2.5 percent against the benchmark currencies, according to POLITICO.