Why china manipulates yuan

The move doesn't change much. Not legally speaking. But it is a big deal, accentuating just how fast things have gone south between the world's two largest economies. When the US Treasury labels a country a currency manipulator - as it has done here with China - the next step would normally be for negotiations to begin between the two countries. In this case, trade negotiations have already been going on for more than a year.

The process also opens the path for America to introduce tariffs. Again, that's already happening as part of Mr Trump's 'America First' approach to trade. It's not clear yet what that will yield. Still it's worth remembering that while the decision may not change much technically, it will have significant political ramifications. Nobody thinks this will increase the odds of a compromise by the Chinese side when it comes to trade.

So don't be surprised if the prospect of a currency war further rattles investors' already frayed nerves. No country has officially been named a currency manipulator by the US since Bill Clinton's administration did so to China in In its announcement, the US Treasury said: "China has a long history of facilitating an undervalued currency through protracted, large-scale intervention in the foreign exchange market.

The US president has long accused China of devaluing its currency in order to support its exports - claims Beijing has denied.

Despite linking the latest slide in the yuan to the trade war, China continued to state it would not engage in "competitive devaluations". Currency manipulation - by China or any other other country - is seen to flout global trading rules by conferring unfair competitive advantages.

A country does so by artificially inflating or deflating its exchange rate. It may be designed to make exports more competitive, to avoid inflation or reduce capital inflows. A paper by Laurence Howard in the Emory Law Review said currency manipulation has "serious effects on the global market". Capital Economics now expects the yuan to end the year at 7. US officially labels China 'currency manipulator'.

How worrying is China's slowdown? US-China trade war: 'We're all paying for this'. Image source, Getty Images. Tariffs backfiring on US, says ex-Trump adviser. How does China devalue its currency?

What is the impact of a weaker yuan? At every turn, the Trump administration had to challenge conventional economic wisdom that, for years, put the interests of coastal elites ahead of the interests of America and its workers.

Nowhere has this been truer than in the realm of international trade. In his ongoing fight to fix this broken system , President Trump pointed out an unfair, dangerous game that competitor nations play in order to gain an edge in trade: currency manipulation. But what exactly is currency manipulation?

Currency manipulation occurs when a government or central bank buys or sells foreign currency in exchange for its own domestic currency to influence its relative value. Say in a simple world that the exchange rate between U. The stronger RMB carries with it more buying power, as all goods and services at a fixed price point become relatively cheaper when paying with the stronger RMB. If China were a large importer of American goods, neither nation would complain too much about this arrangement.

Imagine instead that China were trying to export soybeans to the U. When the exchange rate changes, U. Americans, naturally, would instead buy from other nations at lower relative prices, taking away large swaths of business from Chinese exporters.

This is where currency manipulation comes into play.