STREAMING NOW: Watch Now

This is how China controls its currency

The yuan has become caught up in the trade fight between China and the United States.China's currency...

Posted: Aug 17, 2018 11:19 AM
Updated: Aug 17, 2018 11:19 AM

The yuan has become caught up in the trade fight between China and the United States.

China's currency has declined around 9% versus the US dollar since April and is trading near its lowest level in more than a year.

The fall has drawn the attention of President Donald Trump, who has previously accused China of keeping the value of its currency artificially low to boost its huge export industry. The yuan is "dropping like a rock," he said last month.

How much control does Beijing have over what its currency does?

A different kind of currency

The yuan doesn't trade freely like other major currencies such as the dollar and the pound. Every morning, China's central bank sets a "band" within which the yuan's value is only allowed to move 2% up or down.

Related: Is a currency war coming?

China has historically had reasons for wanting to keep its currency on a tight leash, said Aidan Yao, a senior economist at money manager AXA Investment Managers.

When China was first opening up its economy in the 1970s and 1980s, it was in the country's interest to keep the yuan artificially low to make its growing export industry more competitive against Asian rivals, he said.

Another reason is stability. China escaped the worst of the Asian Financial Crisis in the late 1990s, which battered the currencies of nearby countries, because it was largely shut off to foreign investors.

The People's Bank

Like the Federal Reserve in the United States, China's central bank sets interest rates to help guide the economy, which can also influence the value of the currency.

The People's Bank of China (PBOC) also uses other tools, like dictating how much cash Chinese banks must keep in reserve.

But the PBOC works differently. It's not independent of the ruling Communist Party, so it ultimately takes its orders on monetary policy from China's top leaders.

The central bank has been known to intervene in the markets either through state-owned banks or by delving into its vast foreign currency war chest to prop up the yuan.

It also drops the occasional big surprise, like when it devalued the yuan in 2015.

"The PBOC is still a major player in the foreign exchange market," Yao said. "You don't really see that same kind of intervention with the Fed, European Central Bank or the Bank of Japan."

Related: China's yuan is falling against the dollar. Here's what's going on

The recent plunge

Despite China's ability to play a significant role in how the yuan trades, analysts are skeptical it has driven the currency's recent drop against the dollar and other major currencies.

They say the escalating trade war with the United States and concerns over a slowdown in the Chinese economy have helped push the yuan lower at a time when the Federal Reserve is steadily raising interest rates. That policy makes it more attractive for investors to hold US dollars, prompting them to sell other currencies.

Related: China cuts taxes to protect its economy from the trade war

Even though a weaker yuan makes Chinese exports cheaper, helping offset the impact of US tariffs, analysts argue that Beijing is more concerned with supporting the yuan at the moment. They point to a recent measure Chinese authorities introduced that made it more expensive to bet against the currency.

Such moves are a "signal of intent" that the Chinese government wants a stable currency, said Viraj Patel, a foreign exchange strategist at investment bank ING.

Even though the yuan has fallen sharply in the past couple of months, the PBOC has said in recent statements that it's seeking to keep the yuan broadly stable.

What next?

China wants markets to eventually play a far greater role in determining its currency's value. But it has been gradual process.

Over the past decade, a market has grown for investors to buy and sell a more freely traded version of the currency in financial centers outside mainland China like Hong Kong, London and New York. But its value is still strongly linked to the yuan's price inside China.

Related: The US-China trade war will spill into other Asian economies

Other initiatives in recent years, such as a stock- and bond-trading links with Hong Kong, have made it easier for foreign investors to buy and sell assets priced in yuan.

"China wants to raise its influence in the global financial system," Yao said.

Huntsville/Redstone
Partly Cloudy
67° wxIcon
Hi: 73° Lo: 47°
Feels Like: 67°
Muscle Shoals
Partly Cloudy
71° wxIcon
Hi: 74° Lo: 43°
Feels Like: 71°
Huntsville/Madison
Partly Cloudy
69° wxIcon
Hi: 72° Lo: 43°
Feels Like: 69°
Decatur
Partly Cloudy
67° wxIcon
Hi: 74° Lo: 45°
Feels Like: 67°
Fort Payne
Partly Cloudy
67° wxIcon
Hi: 74° Lo: 44°
Feels Like: 67°
WAAY Radar
WAAY WAAY-TV Cam
WAAY Temperatures

Alabama Coronavirus Cases

Cases: 522512

Reported Deaths: 10790
CountyCasesDeaths
Jefferson755371494
Mobile39129799
Madison34124500
Tuscaloosa25408444
Montgomery24059573
Shelby23225242
Baldwin20730302
Lee15638166
Calhoun14358311
Morgan14171273
Etowah13705348
Marshall12012220
Houston10416279
Elmore10024203
Limestone9862148
Cullman9509191
St. Clair9486236
Lauderdale9280233
DeKalb8762183
Talladega8127173
Walker7151276
Autauga6763106
Jackson6762110
Blount6532133
Colbert6236132
Coffee5436113
Dale4781111
Russell431239
Franklin421382
Chilton4130110
Covington4069115
Tallapoosa3922148
Escambia390374
Dallas3528150
Chambers3519122
Clarke347360
Marion3076100
Pike306676
Lawrence296395
Winston273272
Bibb256761
Marengo248561
Geneva246475
Pickens233259
Barbour227155
Hale218675
Butler213268
Fayette209660
Henry188444
Cherokee182744
Randolph177841
Monroe173140
Washington165538
Macon156548
Clay150255
Crenshaw149557
Cleburne147041
Lamar140034
Lowndes137353
Wilcox124727
Bullock122040
Conecuh109728
Perry107726
Sumter103332
Coosa99428
Greene91434
Choctaw58824
Out of AL00
Unassigned00

Tennessee Coronavirus Cases

Cases: 835842

Reported Deaths: 12081
CountyCasesDeaths
Shelby930851587
Davidson88030924
Knox49813624
Hamilton43402485
Rutherford42319420
Williamson27545216
Sumner23492341
Montgomery19623224
Wilson18472229
Out of TN1803295
Unassigned16760132
Sullivan16184287
Blount15180194
Bradley14599147
Washington14177242
Maury13211169
Sevier13166175
Putnam11168173
Madison10789241
Robertson9607130
Anderson8627171
Hamblen8498171
Greene7739152
Tipton7226104
Coffee6831121
Dickson6734109
Cumberland6568127
Carter6468156
Bedford6426129
Gibson6402144
McMinn636597
Roane6191102
Jefferson6073121
Loudon601669
Lawrence580686
Hawkins5781106
Monroe570995
Warren551381
Dyer5361104
Franklin508688
Fayette492178
Obion450296
Cheatham444454
Cocke443798
Rhea431275
Lincoln430663
Marshall411158
Campbell409662
Weakley402862
Giles395399
Henderson372975
Macon358077
Carroll357582
White354868
Hardin349766
Hardeman346464
Lauderdale314444
Henry312475
Marion309946
Claiborne306273
Scott305545
Overton296961
Wayne294334
Hickman280546
McNairy276854
DeKalb275653
Smith274838
Haywood268361
Grainger259149
Trousdale249022
Morgan246039
Fentress238546
Johnson231638
Bledsoe209711
Chester209451
Crockett201048
Polk200024
Unicoi194549
Cannon188931
Union186034
Grundy177933
Humphreys174221
Lake169526
Sequatchie166728
Benton163240
Decatur157338
Lewis155826
Meigs134823
Stewart130828
Jackson129935
Clay109031
Houston108533
Perry105728
Moore100017
Van Buren83421
Pickett75624
Hancock54912

Community Events