China Lets Its Currency Weaken Past a Key Barrier and Tries to Manage the Fall (Published 2022) (2024)

FAQs

Is China abandoning the U.S. dollar? ›

However, today, China focuses almost exclusively on promoting the yuan through trade. Instead of being paid in US dollars, exporters are paid in their local currency with trade being settled when Chinese importers buy local products.

SHANGHAI, April 16 (Reuters) - Chinese businesses are hoarding dollars because they expect their own currency to weaken, and that in turn is exacerbating a slide in the yuan that has been driven by wobbly stock markets and feeble growth in the world's second largest economy.

The devaluation means that the debt to them has become more expensive. It will also drive up the cost of oil for Chinese businesses and consumers because it is priced in U.S. dollars. These higher costs create a significant headwind for Chinese companies.

China pegged its currency from 1997 to 2005 to the U.S. dollar but since has managed its currency against a basket of currencies. The effect of the peg and the low currency is that Chinese exports are cheaper and, therefore, more attractive compared to those of other nations.

Some say it will be the euro; others, perhaps the Japanese yen or China's renminbi. And some call for a new world reserve currency, possibly based on the IMF's Special Drawing Right or SDR, a reserve asset. None of these candidates, however, is without flaws.

The collapse of the dollar remains highly unlikely. Of the preconditions necessary to force a collapse, only the prospect of higher inflation appears reasonable. Foreign exporters such as China and Japan do not want a dollar collapse because the U.S. is too important a customer.

This is an effort by a growing number of countries to reduce the role of the U.S. dollar in international trade. Countries like India, China, Brazil, Malaysia and Bolivia, among others, are seeking to set up trade channels using currencies other than the almighty dollar.

The Kuwaiti dinar (KWD) is the world's strongest currency, and this is for a number of reasons. For starters, Kuwait has one of the largest oil reserves in the world.

A weaker dollar, however, can be good for exporters, making their products relatively less expensive for buyers abroad. Investors can also try to profit from a falling dollar by owning foreign-currency ETFs or investing in U.S. exporting companies.

Prior to 1971, the US dollar was backed by gold. Today, the dollar is backed by 2 things: the government's ability to generate revenues (via debt or taxes), and its authority to compel economic participants to transact in dollars.

Who controls China's money? ›

The People's Bank of China (PBOC), which is part of the centralized government, controls the money supply in China. Because of its unique export-dependent economic system, China's money supply policies vary from methods used by other nations.

Many of the risks facing China's economy stem from its ailing real estate sector. For decades, China's economy was dependent on a booming property market driven by speculative investment returns. However, this growth was largely driven by debt.

This is an effort by a growing number of countries to reduce the role of the U.S. dollar in international trade. Countries like India, China, Brazil, Malaysia and Bolivia, among others, are seeking to set up trade channels using currencies other than the almighty dollar.

“Elderly Chinese still often prefer to pay with cash and some struggle with using mobile payments.” Less than a year ago, state media was lauding China's trajectory towards becoming the world's top country for cashless transactions. Xinhua reported cash had dropped to just 3.7% of the total money in circulation.

Which countries hold the most US debt? Over the past 20 years, Japan and China have owned more US Treasurys than any other foreign nation. Between 2000 and 2022, Japan grew from owning $534 billion to just over $1 trillion, while China's ownership grew from $101 billion to $855 billion.

The U.S. debt to China is approximately $1.059 trillion. That's 27.8 percent of the $3.8 trillion in treasury bills, notes, and bonds held by foreign countries. The rest of the $19.9 trillion national debt is owned by either the American people or by the U.S. government itself.