The Movement of “the Peoples’ Currency” in China

The Movement of “The Peoples’ Currency” in China

8/2/2016

The controversial issue of the manipulation or devaluation/revaluation of the Chinese yuan, also called the renminbi (which translates to “the peoples’ currency”), has been a subject of much debate over the past few years. Some view China’s moves in lowering the value of the yuan as potentially starting a global currency war. Others argue that China has recently permitted market forces to have a greater influence over the yuan since passing review to be added as a reserve currency by the International Monetary Fund (IMF). In this paper we will discuss multiple arguments from different sides of this debate.

In August of 2015, China depreciated the yuan three times in one week which combined to a total of a 4.4% decrease in value. At this time, the Chinese central bank claimed that the yuan would start moving more in accordance with market forces. This was likely influenced by China’s desire to be included in the “International Monetary Fund’s basket of currency known as Special Drawing Rights (SDR)” (Desjaredins, 2015). This shook investors up as many sorts of trading went wild as a result of the yuan devaluation. Countries that are linked to China via trade markets also had their currencies fall as a result, including Singapore, Australia, and New Zealand. In addition to this, a major part of the aftermath was the effect on commodity prices. When the yuan is devaluated, imports become more expensive and more people are prompted to purchase from domestic Chinese producers. Some traders saw this as an admission by the Chinese government that the economy is weakening when copper and oil dropped to their lowest trading positions in quite a long time. While all of this seems to provide ample evidence as to why traders should start worrying, many argued that this large of a devaluation would most likely be a one-time event and that if you take into consideration the different levels of...