What is currency manipulation? | CNBC Explains

It’s been one of Trump’s favorite accusations toward other nations. Currency manipulation. A currency manipulator. China is a currency manipulator. But how can banknotes like these, be manipulated? Let’s break it down. One example of currency manipulation is what a country might do when it wants to minimize the effects of having a strong currency. Let’s say for example, that one U.S. dollar is equal to ten dollars in the Republic of Monopoly and with ten Monopoly dollars, I can buy one cup of coffee from the United States. Now imagine that gradually inside the Republic of Monopoly, the economy starts doing very well and is extremely stable. The currency naturally could rise against all other currencies. So now that one U.S. dollar only earns you eight Monopoly dollars instead of ten. For me to buy that same cup of coffee from the United States, I only need to pay eight Monopoly dollars. So, it’s cheaper for me. So, this currency has become more valuable. My citizens have more spending power when they travel abroad and as a country we have more buying power when I want to import goods. So, what’s the problem? Why manipulate? Say I want to sell muffins to the U.S. Instead of the U.S. paying me one dollar like it used to, it would now cost them $1.20, all because my economy was stronger and my currency is doing well. No real change in taxes or monetary policy and if I’m a large exporter and shipping out more goods than I’m bringing in, like China, this makes my goods much less competitive. In fact, you might even begin buying from another country. Hence, the urge to manipulate. There is a number of other reasons a country might choose to do this besides maintaining competitiveness, including wanting to control inflation or just maintain its own financial stability. China, is of course one of the most targeted countries for currency manipulation. When it devalues its currency, it essentially wants to keep the cost of all its goods and services less expensive than other countries. It’s the world’s second-biggest economy after the U.S. but according to experts, it actually hasn’t been pushing down its currency to benefit Chinese exporters in years and even if it were, there’s a law which requires the U.S. to spend a year negotiating a solution before it can retaliate. President Trump recently backtracked on his initial stance of labeling China as a currency manipulator but his accusations aren’t completely unfounded. In 1994, the U.S. branded China a currency manipulator. Under the law, though labeling a country as such can trigger an investigation and require negotiations on tariffs and trade. China’s yuan is becoming more influential on the global scale. It was recently added to the International Monetary Fund’s basket of reserve currencies which are currencies deemed safe, reliable, and freely used. Joining the U.S. dollar, the euro, the yen, and British pound. In fact, it was the first time a new currency was added since the euro was launched in 1999. The move positions China and its currency as a global economic power, which is why it’s so important for it to maintain that currency’s credibility.

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