Eli5, how can the the Chinese Yuan be cheap when they have a strong economy while Jordanian Dinar is the opposite?
In: 19
The strength of the economy and the value of the denomination is completely unrelated. When a government introduces a currency they can pick any value they want for this new currency. And the value is affected by previous periods of inflation which have since been corrected. Compared to the US cent the Chinese Yuan is quite expensive.
There are two possible questions you’re asking here, and I’ll try to address both.
1. “Why is one Jordanian Dinar worth more than one Chinese Yuan.” Because denominations of this sort are arbitrary. You can add or subtract zeroes from any currency without fundamentally changing anything. It’s largely a historical accident that some currencies started out “cheap,” meaning you need lots of them to buy a thing; since then, the country’s monetary policy (inflation, deflation, money printing, etc) have affected how much a unit of that money buys at the moment.
2. “Why is the Jordanian Dinar getting stronger relative to the Chinese Yuan?” I don’t know if this is true – it probably is some of the time. The relationship between two fiat currencies like this is based on supply and demand. If suddenly Chinese businessmen want to buy a Jordanian business, they’ll have to sell Yuan to buy Dinar to buy the business, so the Dinar will rise slightly and the Yuan fall slightly; the opposite is true the other way. If the Chinese central bank increases the supply of Yuan (to try to stabilize or grow the Chinese economy), then the Yuan will fall relative to the Dinar if Jordan is doing the same thing, since there are suddenly more Yuan around. Relative rates of economic growth and investor expectation play themselves out this way, as investors buy currencies in expectation. Obviously there are a lot more than these two currencies, so this gets pretty complicated.
Because the value doesn’t day anything about the strength
They could have made the US dollar 100x as cheap or more expensive, it doesn’t make it stronger or weaker. When making a currency they can pick any value they want.
Gonna get this in here early because it is important.
The Dinar is pegged to the US Dollar. So if the US dollar goes up, so does the Dinar and vice versa.
This comes with many other problems but that’s the short answer.
Others are already answering the how, but the why is very important here. China wants to keep the yuan cheap so the world can keep on buying massive amounts of cheap stuff from them.
If you want to invest in a business in China you’re dealing with a government partnership where the government takes a cut. If you want to invest in a business in Jordan not only does government not take a cut but you don’t even pay tax on the investment. Where would you rather put your money?
The regulators overseeing the Chinese Yuan have a huge incentive to keep the value of the Yuan compared to reserve currencies, like the USD and Euro, artificially low. This is because China’s economy is almost entirely built off of exports, and they have to keep the exchange rates low to maintain their “factory of the world” title. If their currency strengthened too much, manufacturers would look to move to countries like Vietnam, India, or Mexico.
So, the question is how do they manipulate their currency values. And it comes down to what the Chinese regulators do in order to increase the demand/reduce supply of reserve currencies (USD, Euro) while lowering demand/increasing supply of the CYN. To simplify it, they spend their export profits on buying USD and Euro denominated investments. Things like US treasury bonds or other US/European assets.
China has been accused of currency manipulation going back to the Obama era. That was also when people started talking about China “owning” the US as they became one of the largest foreign holders of US government debt. Those two go hand in hand and China didn’t really have much of a choice in the matter. The massive trade imbalance between China and the US meant that China had to buy those bonds or see the CYN skyrocket against the USD which would have wrecked their economy.
The Chinese Yuan (RMB) is a special example because of how China manages its currency.
Most other countries (I don’t know about Jordan but I presume this includes Jordan) do not manage the value of their currency. The currency value goes up and down according to the supply and demand in the free market. If people want to buy Jordanian Dinar, then they do, and the value goes up, if they want to sell, then the opposite.
The RMB is different. China actively manages the value of its currency and artificially pegs it to whatever it believes is appropriate relative to the USD. How exactly this works I’m not exactly sure, but the way I assume it works is that the Chinese government directly involves itself in foreign exchange markets, buying and selling currencies to make sure the RMB never gets too valuable (in which case it dumps a load onto the market) or too cheap (in which case it buys a bunch from the market). The government also mandates exchange rates within the country on a daily basis (having been to China I’ve seen this first-hand).
The reason China does this is because China’s economy is almost entirely based on exports. If a country’s exports are too expensive, importers will look for other places to buy. In order to keep China competitive, it has to keep its currency cheap, but not so cheap that its people can’t afford living expenses. Based on the fact that China is the world’s second largest economy, the RMB should not be as cheap as it is, but it is because the Chinese government manages the price.
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