One of the longest-running political mantras among certain circles of the political class in the United States is that China is a currency manipulator. According to this group, China is artificially keeping the exchange rate of the yuan low. This is, by and large, true. China is pegging the yuan at an artificially low rate to the US dollar. A cheap yuan makes Chinese exports more attractive. China has still a predominantly export-driven economy and it is in its interest to keep the yuan low.
For the past decade or so, China has been actively buying up foreign currencies and selling yuan to artificially depress the value of the yuan. Now that the US dollar has strengthened and commodity prices have sunk, the People’s Bank of China has found itself in a very unusual position. Now it’s actively buying yuan and selling off its foreign currency to keep the yuan afloat. That’s how strong the US dollar is. This should not be a surprise in light of the fact that the Chinese economy is slowing down.
Considering the fact that we really cannot trust official Chinese government figures all that much, one thing is clear: whether the Chinese GDP has crashed below 7% or actually underperformed based on official figures, the economy is slowing down. There’s less confidence in China and this is putting a lot of downward pressure on the yuan. It is interesting to see the People’s Bank of China stepping into the market and buying yuan to shore up its value while unloading foreign currencies. If this pattern persists for a long enough period of time, this should be a cause for concern for the Unites States. Why? China is the world’s largest holder of US debts. If it unloads all that dollar-denominated debt in the market, this can harm the United States. A strong dollar is helpful only up to a certain point.