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Yuan no Longer Undervalued: IMF

Yuan no Longer Undervalued: IMF

The yuan or renminbi, is the currency of China, and as long been subject to strict government controls with regards to currency trading and exchange rates. As China modernized and underwent its post-Mao economic boom, the government has sought to keep tight control over the currency so as to prevent financial crises and currency speculation from undermining economic stability. Economic stability is the primary concern of the Chinese Communist Party (CCP), as it has long underpinned socio-political stability in the country. By ensuring adequate growth rates and standard of living improvements, the CCP has been able to diffuse social unrest and demands for political reform.

With this in mind, it is interesting to note that China is now loosening its currency controls. This can be seen as an effort to increase growth in currency markets, as Beijing seeks new markets to counter declining growth rates due to the country’s maturing economy. Previously, China had maintained a fixed exchange rate of around 6.8 yuan per USD. This had led to accusations that China was artificially maintaining a low exchange rate in order to boost exports. Such accusations have led many in the West to label China as a currency manipulator, and advocate for punitive action.

However, in recent years China has been slowly reducing controls on its currency. To this end the yuan has slowly appreciated to a high of around 6 per USD in January 2014, before declining to 6.2 per USD. This has led the International Monetary Fund (IMF) to state that;

“Our assessment now is that the substantial real effective appreciation over the past year has brought the exchange rate to a level that is no longer undervalued.”

This is part of Chinese efforts to promote the yuan as an alternative global reserve currency, and increase forex trading with yuan. Nations can gain influence and power, when other countries seek to do business and themselves hold large amounts of said nation’s currency. Undertaking purchases and sales in yuan also benefits China, as it does not have to exchange yuan into other currencies. China is also the chief backer of the new Asian Infrastructure Investment Bank (AIIB), which China hopes will provide a yuan backed alternative to the World Bank and Asian Development Bank. China has also signed yuan clearing agreements with ten countries and currency swap agreements with 28 central banks.

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