The Chinese Yuan Currency Peg and Its Impact on Trade

In this article, we will explore the reasons behind China’s decision to implement a currency peg for the yuan and the effects it has on trade. We will examine how this monetary policy keeps the value of the yuan low compared to other countries, making Chinese exports more affordable and attractive on the global market. Additionally, we will discuss the economic benefits and drawbacks associated with this strategy.

Since 1994, China has employed a currency peg for the yuan, aiming to maintain its value at a lower level compared to other currencies. This deliberate undervaluation encourages consumers using foreign currencies, such as the US dollar, to purchase more Chinese exports. By sustaining a weaker yuan, China can boost its export activity, which is crucial for any economy as it brings in more money to the country. To achieve this, the People’s Bank of China frequently engages in currency purchases, significantly increasing their foreign exchange reserves over the years.

Currency manipulation, through a low yuan, has played a significant role in China’s remarkable economic boom. The nation has consistently achieved impressive growth rates of over 10% in the past two decades. Particularly, China’s industrial sector has thrived, leading it to become the world’s largest manufacturer in 2010. This economic success is reflected in the substantial increase in China’s gross domestic product (GDP) per capita, which rose from $473 in 1994 to $10,262 in 2019. In comparison, the United Kingdom only experienced a 115% increase in GDP per capita during the same period. As estimated by the United Nations, China’s rapid expansion has secured it a 25% to 26% share of global manufacturing output since 2014. (source)

While China benefits from its currency peg, some argue that it creates an unfair advantage for Chinese companies, leading to trade imbalances with other nations. U.S. manufacturers and workers have expressed concerns over the Chinese trade surplus. However, it’s important to note that an undervalued yuan offers advantages to U.S. consumers, as it keeps the prices of Chinese goods low and helps maintain overall inflation at a modest level. Businesses also benefit from reduced production costs when utilizing less expensive imported items from China. Furthermore, Chinese trade deficits lead to the movement of capital to the United States, which can result in lower borrowing costs and support economic growth. (source)

Pegging the yuan to a lower value is a deliberate strategy that provides significant benefits to the Chinese economy. By making Chinese exports more appealing on the global market, China’s economy thrives. Over the years, China has proven the effectiveness of its currency peg, demonstrating the success of this expansionary policy.

China’s currency peg for the yuan has played a crucial role in its economic growth and industrial success. By ensuring that Chinese exports remain affordable and attractive on the global market, China has boosted its economy and become a major player in manufacturing. Despite concerns raised by other nations, the deliberate undervaluation of the yuan provides benefits such as lower prices for U.S. consumers and reduced production costs for businesses. China’s strategic move has proven effective in promoting economic prosperity and establishing its position as a dominant player in global trade.