Would China Be Targeted By New Bill?

The Chinese yuan doesn’t tend to be one of the biggest currencies when it comes to the currency markets.  However it isn’t among the small ones either - and it has certainly attracted some attention from some quarters.  This is because some think that a certain degree of manipulation is used to maintain the yuan at a level that is favorable to those who are in charge of that particular country.

At present there is a possibility that a new bill in the US might put tabs on the practice of currency manipulation.  This is a practice that several countries are thought to be taking part in, although not everyone will stand up and point to the ones that are doing it.  You can read more about this story on the Wall Street Journal website, at the following link.

So what exactly is currency manipulation and how does it work?

Well, the idea is a simple one – but it can have far reaching effects.  Think about the currency markets for a moment, as this is where we will find our answers.  We will use a fictional example to illustrate how it works.

Country A uses currency A, and country B uses currency B.  Now in the normal run of things, these two countries both accept that their currencies will fluctuate and the exchange rate between them will go up and down according to a number of factors.  These could include how well their separate economies are performing, and whether there is any good or bad news coming out of the country.

We have seen this happen in real life on many occasions.  One good example shows that the British pound has dipped and become weaker against the US dollar when negative news about the recession has come out of the UK.  The same could happen equally to our fictional currencies and countries.  The bottom line effect on our currency converter would be the same.

But let us suppose that a third country comes along – country C, which uses currency C.  But instead of joining in and letting things happen naturally, ebbing and flowing as they do in most currency markets, they decide to do things differently.

They decide they will set their own exchange rate to suit themselves.  So let’s say for example that one unit of currency C should be worth one unit of currency B.  That might not be favorable to country C, so they decide to make it worth half a unit instead, or perhaps two units.  It depends on what they want to achieve.

You get the picture though.  And if you read enough news online and in the papers today, you will be aware that this practice of currency manipulation does go on all around the world.  But far fewer countries are doing it today than there used to be in the past.

You might be surprised to know that currencies have been devalued in different ways for years.  In fact it was the Romans who really started it all.  Back in those days coins really were made of precious metals.  So if you had a bag of gold coins, that bag and its contents really would be worth its weight in gold.

But of course over time other items were added to the mix, and the coins had less and less gold content than they had originally.  The same happened to silver coins and to bronze ones too.

We don’t have that type of money any more, so those countries which do go in for manipulation do it by fiddling with the exchange rates instead.  This is what the proposed bill is going to try and put a stop to.

But it is something that has long been a problem, and it is unlikely to be solved anytime soon.  That may sound cynical but it is a fact.  Other people have tried and failed to solve it, and of course the problem goes deeper than that too.

It isn’t politically a wise move to accuse another country of manipulating their currency.  It doesn’t matter if everyone knows it is happening – actually saying it out loud and pointing the finger can lead to more problems.

So it will be interesting to see whether or not this bill even gets off the ground.  And if it does, which countries will get caught up in its net?