What is Currency Manipulation?

Posted by Allison on 25 September 2013, 20:12

So how much do you know about currency manipulation? Are you familiar with the fact it goes on in various countries from time to time? Do you know what it means and how it can affect our economies?

Let’s have a closer look to see what it is and what it means. When a country decides to manipulate its own currency, it sells it and buys reserves in another currency instead. For example, China has recently been in the news for doing just that. China uses the yuan in its daily transactions, but it has been selling it for some time and buying reserves in other currencies instead – most notably the US dollar.

When this situation happens, the currency being sold (in this case the yuan) doesn’t perform freely on the currency markets as it usually would. The act of selling it and buying another currency means the sold currency is being pegged to the currency being bought. This means the country doing the buying and selling is essentially controlling the value of its currency on the world markets.

Now you might wonder what good all this does. In truth it won’t provide an advantage over other countries in some situations. But in others, it definitely will – and this is the case with the currency manipulation being practiced by China. Their strong currency has weakened as a result of their actions, and that has led to their exports becoming cheaper to those foreign companies looking to buy them. If China relied more on imports than exports, there would be no reason to manipulate their currency. But it doesn’t – in China exports are by far the stronger area of their economy.

Thus the manipulative practices have seen a huge improvement in the Chinese economy. In fact it is on the verge of achieving double digit growth in this year alone. Compare that with the struggles of most Western economies and you will understand just why some countries focus on currency manipulation as a way to get ahead of the crowd.