Eli5 Why is the value of the Chinese Yuan small compared to other countries (excluding US) even though it has the second largest economy in the world?


Eli5 Why is the value of the Chinese Yuan small compared to other countries (excluding US) even though it has the second largest economy in the world?

In: 29

The value of a base unit of currency is irrelevant. What matters is its growth (or decline), [the overall size of the economy it represents](https://www.reddit.com/r/explainlikeimfive/comments/t4r2xi/eli5_why_is_the_value_of_the_chinese_yuan_small/hz0dwb0), and the purchasing power of its people.

The base unit of Japanese currency is the Yen.

It takes about 100 Yen to equal 1 US dollar. Does that mean the Japanese currency is 100x weaker than the US currency? No.

What would matter is if that exchange rate for 1 dollar changed from 100 Yen to 200 Yen, or from 100 Yen to 50 Yen.

Look at how the exchange rate of Yuan to dollar has changed over time to see the changing (mostly increasing) strength of the Chinese economy reflected over time.

Similarly, imagine if the base unit of American currency changed to the penny. Then 1 Yen would be equal to 1 penny instead of 100 Yen being equal to 1 dollar. Does that change anything? No, because 1 Yen already equals about 1 penny.

Similarly, if 6 Yuan is about equal to 1 dollar, China could change their currency to the decaYuan (i.e. 10 Yuan becomes the decaYuan) overnight and then suddenly 1 decaYuan would be equal to almost 2 dollars! Would that change anything? No, because 10 Yuan is already eqaul to almost 2 dollars.

An economy is a pizza, the currency is how many slices it gets cut up into. A small pizza could be cut in half. An XL pizza could be cut into 20 slices. Each half of the small pizza might be larger than one of the 20 slices, but the XL pizza as a whole is still larger.

The yuan is just a unit of currency. Its value is in what it can buy, not hiw it compares to currencies of other markets.

Asking why the yuan is small compared to the a US dollar is like comparing the US cent to a Euro or the Japanese yen to a Canadian dollar.

All currency is somewhat imaginary when it comes to value. The market (supply and demand) decides what the buying power is worth.

How much a loaf of bread or a pound of rice costs in the local currency is far more important than something abstract like how many “cowrey shells” you can get for a “buck”.

Consider that if the yuan was worth 1/10th of a dollar then a can of coke costs one dollar and it costs ten yuan. Then if you earn 10 US dollars mowing a lawn, then you also earn 100 yuan moving a lawn in China.

The top answers are very good about exchange rates but I’m surprised that no one has hit on a key point about the Yuan, which is that the People’s Bank of China (which is responsible for the monetary policy and for fiscal regulation in China) has purposefully devalued the Yuan in the past. In 2015, the PBOC literally devalued their own currency 3 times rapidly and took off a lot of value compared to the USD. At the time, people were confused as to why a country would devalue their own currency on purpose, but over time it’s become somewhat accepted that by devaluing their own currency they could keep their goods cheap for other countries to buy, even as their economy was growing and their currency was getting stronger. It appears that the fiscal policy makers in China were worried that as the Yuan got stronger their exports would become less affordable for the rest of the world who would seek other suppliers.