For many investors, China and its economic policies have appeared to be at the epicenter of major shifts in the global economy—shifts with commodities prices and global commerce, stock market fluctuations, and foreign exchange levels. As the main engine of trade in the dynamic economy of Asia, China and its currency the yuan have exercised growing roles in that region and across the globe. As it struggles to evolve from an underdeveloped emerging market to a central player in the global economy, China has experienced growing pains and faced policy decisions that have frequently sent shockwaves through markets around the world.
Unlike many of its international trade partners who allow the values of their currencies to float freely against others , China has a strictly controlled currency policy where it regulates trading activity and tries to control daily movements of the yuan on the forex market.
In order to tame economic instability, China fixed its exchange rate in at slightly more than 8 yuan to the United States dollar and maintained that peg until July , when it made a move toward a liberalization of its currency policy by introducing a narrow trading band.
In August , China took a step further by allowing its currency to devalue outside of the previous trading band. China has maintained strict rules for individuals and banks holding foreign currency, and thus the currency is not yet considered to be fully convertible. The government then prints local money for use by individuals, companies and banks.
China has customarily used a portion of its reserves to influence the value of its currency through foreign exchange market interventions. To strengthen the yuan, the Chinese central bank sells foreign currency reserves typically dollars into the market.
On the other hand, if the country wants to weaken its currency, it uses its local currency to buy foreign currency.
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It is estimated that China is the largest single nation holder of U. The central bank also has other instruments at its disposal, such as derivative contracts to influence the market and the value of the currency.
It has used a combination of these instruments to bring more sophistication to its management of currency rates and foreign reserves. This can slow the depletion of its reserves, thus maintaining market confidence in its ability to intervene in the future. As part of its effort to shore up the yuan, China has begun selling some of its stockpile of U.
Following its initial liberalization of currency policy in , the Chinese central bank had maintained higher interest rates. In , however, the bank began easing local interest rates to counteract a slowing economy. The rate easing had the effect of discouraging foreign currency inflows into the economy and subsequently brought pressure for the weakening of the yuan. In addition to altering interest rates, the government can alter reserve requirements within the domestic banking system, freeing up the supply of local money available to the market.
While China currently maintains its currency rate within a controlled band that fluctuates according to market demand, some market participants have noted the central bank has at times signaled its preferences for near-term currency levels through its interbank foreign exchange system.
In particular, the government has been suspected of occasionally using its automatic price-matching system, which is a centralized computer system used to identify bids, to make trades on the extreme ends of market trading ranges.
As the yuan has not been made fully convertible, China has faced difficulties maintaining strict control over its currency levels while seeking to adapt to shifts in the global economy and maintain economic growth. The country has sought to integrate itself further into the global economy by aiming to promote the yuan as an international reserve currency, similar to the dollar, the British pound , euro , and the Japanese yen. This is part of an effort to construct a stable economy for its growing population of 1.
The Special Drawing Rights, or SDRs, are a virtual currency that can be lent to central banks to cover for balance of payments shortfalls. In December , the IMF said that it was prepared to begin including the yuan in its basket of currencies backing the SDR as soon as October Despite its ambitions, speculation has arisen whether China will have the political will to follow through with its plans to further ease currency restrictions and risk losing too much control over its economy. This has forced the government to step in to sell reserves.
This has caused some to believe the country may be persuaded to allow a free float of its currency sooner than imagined. Leverage can work against you. Be aware and fully understand all risks associated with the market and trading. Prior to trading any products offered by Forex Capital Markets Limited , inclusive of all EU branches, FXCM Australia Pty. Limited , any affiliates of aforementioned firms, or other firms within the FXCM group of companies [collectively the "FXCM Group"], carefully consider your financial situation and experience level.
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Easing A Fixed Rate Unlike many of its international trade partners who allow the values of their currencies to float freely against others , China has a strictly controlled currency policy where it regulates trading activity and tries to control daily movements of the yuan on the forex market.
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Market Intervention China has maintained strict rules for individuals and banks holding foreign currency, and thus the currency is not yet considered to be fully convertible. Top Economic Indicators For The Chinese Economy.
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