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