What is the yuan’s exchange rate with the US dollar? The exchange rate between the Chinese yuan (CNY) and the US dollar (USD), as with other currency pairs, is the value of one currency against the other. Typically, the yuan’s exchange rate to the US dollar is quoted as USD/CNY to represent how many yuan it takes to buy one US dollar. The US dollar is freely convertible into the currencies of all developed economies without restrictions and its trade-weighted value – expressed by the dollar index, or DXY – affects its value against the Chinese yuan, whose exchange rate is managed by the Chinese government. In China’s case, a lower yuan exchange rate figure actually indicates a stronger Chinese currency as it means it takes fewer yuan to purchase one US dollar. In the same vein, a downward sloping graph of the USD/CNY exchange rate reflects an appreciation path for the yuan’s value, while an upwards sloping graph reflects yuan depreciation. Why is the yuan’s exchange rate with the US dollar important? The USD/CNY exchange rate, in addition to being an indicator of relative economic strength, has a direct impact on each nation’s economy by affecting the value of imports and exports. In general, a stronger exchange rate makes a country’s exports more expensive, which can reduce demand for them. But a stronger exchange rate makes imports, in particular energy products, cheaper, potentially increasing demand in the longer run and helping to hold down domestic inflation in the near term. So a weaker yuan against the US dollar would generally make Chinese goods exported to the US cheaper, increasing demand, while making US exports to China more expensive, reducing demand. As a result the US trade deficit would likely widen. A stronger yuan against the US dollar would have the opposite effect. What is the US-China trade war? Because China runs a large trade surplus with the United States – which reached US$78.18 billion in December, and US$535.03 billion for all of 2020 – its exchange rate has become a bone of contention. The main goal of the trade war pursued by the Trump administration was to sharply reduce the large trade deficit with China. The US has claimed for a number of years that the yuan’s exchange rate was too weak, reducing the cost of Chinese exports to the US and boosting the trade imbalance. In addition, Beijing may have used an undervalued yuan to partly offset the impact of US trade tariffs by making Chinese goods cheaper to buy, US Treasury Secretary Steven Mnuchin claimed in June 2019. What is the history of the US dollar-yuan exchange rate? For a decade from 1995, Beijing maintained a “hard currency peg” at 8.38 against the US dollar amid the country’s export boom, triggering criticism from the US government that it was artificially holding down the value of the yuan through foreign exchange intervention to give Chinese exporters a competitive advantage. But in July 2005, t he People’s Bank of China (PBOC) revalued the yuan by 2.1 per cent and announced a shift to a “soft peg” that allowed the currency to trade more freely within a managed exchange rate regime. Cliff Tan, an independent economist, said that China’s intent for the yuan exchange rate changes at the time was to maintain bilateral relations with the US rather than to use it to boost economic growth or to manage domestic inflation. “Our understanding was that the yuan was de-pegged because [then Chinese president] Hu Jintao wanted to bring a gift to the US ahead of the summit with George W. Bush at the time,” Tan said, referring to then Chinese president Hu’s meeting with Bush in New York in September 2005. “Both sides were taking the currency very seriously as a significant level of concession in terms of their bilateral relationship.” The tremendous expansion in economic ties between the US and China, which accelerated with China’s entry into the World Trade Organization in 2001, has put the yuan’s exchange rate with the US dollar under the spotlight. In recent years, the PBOC seems to have quit its routine intervention in the foreign exchange market, leaving the yuan’s exchange rate to be determined more by buying and selling forces in the foreign exchange market. However, Beijing has used other tools to continue to manage the yuan, with the implementation of strict capital controls so far being the most successful in stemming the decline of the yuan. China’s yuan vs renminbi: what’s the difference? The PBOC sets a daily reference rate for the yuan against the US dollar, which forms the centre of its allowable trade range for the day and reflects its intention for the currency. The yuan is allowed to rise or fall by 2 per cent on either side of the daily parity, which the PBOC often uses to signal to the market its stance for the currency. At times, the PBOC has also included a secret “countercyclical factor” in the formula used to calculate the yuan’s daily parity rate. It has used it to maintain the yuan’s relative stability against the US dollar in the face of strong depreciation pressure on its currency. In 2020, the PBOC abandoned the use of the countercyclical factor showing its confidence in letting more market forces to set the yuan’s daily parity amid appreciation pressure on the yuan. Why did the US accuse China of currency manipulation? The US Treasury Department declared China a “currency manipulator” in August 2019 after the yuan weakened below the key psychological threshold of 7.0 to the US dollar for the first time in more than a decade. “The context of these actions and the implausibility of China’s market stability rationale confirm that the purpose of China’s currency devaluation is to gain an unfair competitive advantage in international trade,” the US Treasury said at the time. The US Treasury’s announcement of the designation cited some paragraphs from the PBOC’s own statement on the same day in an attempt to prove that “China has taken concrete steps to devalue its currency”. “In a statement today, the People’s Bank of China noted that it ‘has accumulated rich experience and policy tools, and will continue to innovate and enrich the control toolbox, and take necessary and targeted measures against the positive feedback behaviour that may occur in the foreign exchange market’,” said the US Treasury on August 5, 2019. “This is an open acknowledgement by the PBOC that it has extensive experience manipulating its currency and remains prepared to do so on an ongoing basis.” On the day in question, the yuan slid 1.3 per cent to 7.0298 against the US dollar in response to US President Donald Trump’s threat to impose a new 10 per cent tariff on the US$300 billion of Chinese imports not yet subject to tariffs, effective from September 1, adding risks to the mainland’s slowing economy. China vowed to retaliate if the US went ahead with the new tariffs. China dropped the price of their currency to an almost a historic low. It’s called “currency manipulation.” Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time! — Donald J. Trump (@realDonaldTrump) August 5, 2019 The break in the yuan below the key threshold of 7.0 to the US dollar, analysts said, was a deliberate decision made by China’s central bank, which had decided that the currency could be part of its arsenal in fighting the US-China trade war. Trump hit out at the yuan’s decline, calling it “currency manipulation”. “This is a major violation which will greatly weaken China over time!” he tweeted at the time. How did China respond to the accusation of currency manipulation? China’s central bank flatly rejected the charge from the US that it was intentionally using the exchange rate as a trade war weapon to offset tariffs, stressing that the yuan’s decline was driven by market forces amid souring economic fundamentals and market sentiment. “China has refused to engage in a competitive devaluation despite the US escalating trade tensions from 2018, nor has it used [the exchange rate] as a tool to address [the trade conflict],” the PBOC said in a statement a day after the designation was announced. However, analysts at the time said that the PBOC’s decision not to defend the key threshold gave the Trump administration the perfect excuse to extend the bilateral dispute. Was the US dollar-yuan exchange rate included in the phase one trade deal? As part of the phase one trade deal signed between Trump and China’s Vice-Premier Liu He in January 2020, China promised not to engage in competitive currency devaluation. China also agreed to publish relevant information related to exchange rates and external balances. Within chapter five of the deal, titled Macroeconomic Policies and Exchange Rate Matters and Transparency, clause four of the general provisions states that “the parties shall honour currency-related commitments each has undertaken in G20 communiqués, including to refrain from competitive devaluations and the targeting of exchange rates for competitive purposes”. Article 5.2 of the deal concerning exchange rate practices, also states that “each party confirms that it is bound under the International Monetary Fund (IMF) Articles of Agreement to avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage. “The parties shall refrain from competitive devaluations and not target exchange rates for competitive purposes, including through large-scale, persistent, one-sided intervention in exchange markets.” The US removed China’s designation as a currency manipulator two days before the signing of the phase on trade deal. What is the outlook for the yuan’s exchange rate with the US dollar? The yuan has experienced significant depreciation in the past five years as the Chinese economy slowed. But China’s leaders are now seen to be shifting towards a stronger exchange rate policy to help domestic consumption in response to the likelihood of persistent US-China tensions in the coming years, according to analysts. The yuan appreciated 6.3 per cent in 2020, with an 8.5 per cent rise over the second half of the year alone, pushing it to its strongest level against the US dollar in 30 months. This was partly due to China’s rapid economic recovery from the coronavirus and Beijing relaxing market restrictions to boost foreigner ownership of Chinese assets and to promote the international use of the yuan. As foreign investors pile into China’s economy and its financial markets, the yuan is predicted to rise further, to 6.30 per dollar in the first half in 2021, according to Standard Chartered Bank. Want to know more? In every episode of the Inside China podcast, we take a deep dive into a specific topic, mixing independent reporting and exclusive interviews to bring you unique insights into an emerging potential superpower. Now, we are featuring regular updates on the coronavirus pandemic from across the country. Also, each week political economy journalist Finbarr Bermingham wraps up the latest developments in tariffs, diplomacy and economics from reporters and editors at the Post in the US-China trade war podcast.