What is currency manipulation and how can a country engage in it.
In: Economics
Having a strong currency makes it cheaper for people in your country to buy foreign goods. The downside to this is that it harms domestic manufacturing, which hurts a country’s long term economic potential.
Having a weak currency helps domestic manufacturing, which helps a country’s long term economic potential. The downside to this is that its more expensive for people in your country to buy foreign goods, so they have less stuff in the short term.
In the modern economic system the only way to manipulate a currency is to restrict the outflows of foreign currency in your country. China is the main country doing this right now, so I’ll just use how they do it as an example.
If you’re a Chinese company that is selling goods to the US, you will be paid for those goods in dollars. But its illegal in China for anyone but the government to own foreign currency. This means when you get paid in dollars you have to turn those dollars over to the Chinese Central Bank. The Chinese Central Bank then gives you Chinese Yuan (the currency used in China) in a set amount based on how many dollars you brought in. The rate of dollars to Yuan is set by the Chinese government completely irrespective of what the international conversion rate between Yuan and Dollars is.
Although the international conversion rate between Yuan and Dollars isn’t particularly relevant either because its *also* illegal to use Yuan to make payments to foreign entities without permission from the Chinese government.
Every year the Chinese government authorizes certain distributions of Dollars and Yuan for Chinese companies to use to make international purchases. However, these distributions are far lower than the currency that the Chinese government is taking in. And these distributions of currency are rarely allocated for anything other than the purchase of raw materials necessary for industrial production.
This creates a situation in which China is functioning as a sort of currency black hole to the rest of the world – money goes in but it never comes out. This reduces the supply of currency in other countries, driving the price of it up (IE – artificially making other currencies stronger).
This is all made possible because the Chinese government is willing to sit on gigantic piles of foreign currency for the indefinite future. This means that it is virtually impossible for Chinese citizens to buy foreign goods, but has been responsible for building up China’s industrial base to the point that its at today.
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