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Who sets the yuan exchange rate - perhaps this is the question most often asked by those who follow the development of this currency. The PRC is a unique country with a rich history that has had a strong influence on its national means of payment (yuan history). The Chinese government fixes the average exchange rate of the yuan every day. It is partly based on the closing level of the previous session. The currency is allowed to deviate from it by a maximum of 2% up or down. Correction is made by the following methods:

  • by redeeming the yuan;
  • through the sale of currency by the authorities of the country.

Thus, the yuan's intraday volatility is severely limited. According to leading Western experts, the central bank's guidelines still leave quite a lot of room for the formation of the final price of this currency.

Trading on two markets

So, who determines the yuan exchange rate and what determines its value the most? To answer this question, you need to study the materiel better.

The People's Bank of China is the central bank of the People's Republic of China, which exercises its functions of regulating the exchange rate of the national currency, under the leadership of the government of the country.

The mainland Chinese market is very tightly controlled by the state authorities. However, there is also an offshore market with an offshore yuan. In this market, the trading range of this currency is actually not limited by anything at all. The offshore yuan is traded primarily in Hong Kong, and its movement directly reflects the opinion of most large investors about the direction in the continental market.

At the same time, the cost of borrowing varies greatly. If the National Bank of China needs to support its currency, but at the same time not harm the country's domestic economy, it is offshore that raises interest rates. As a result, indicators against the yuan are more costly.

Colossal stock of foreign currency

The People's Bank of China

I note that China's foreign exchange reserves amount to more than $3 trillion. This is the main management tool. If the yuan at some point begins to gradually lose ground and weaken, the government will sell part of the US Treasury bonds or any other assets owned by the country. The proceeds are used for the urgent purchase of a national means of payment. This is how the country's leadership maintains the rate of its domestic currency within the established volatile corridor. So now you know exactly how the yuan exchange rate is regulated.

Between 2014 and 2017 reserves fell by nearly $1 trillion. At that time, the currency was extremely unstable. The People's Bank of China has invested quite a lot of money in the yuan, while China's largest investors were moving capital abroad with might and main. Of course, in the future, these methods were strictly suppressed by the leadership of the PRC.

In addition to the People's Bank of China, other major banks can also support the yuan. For example, last year they bought swaps and thus supported the currency without reducing the amount of their reserves.

China's current position in the world market

Despite all the economic strength of this state, only 2% of the total volume of international foreign exchange transactions are transactions involving the yuan. Although, it is quite logical. Suffice it to recall how strictly Beijing controls all the movement of national funds within the PRC and beyond its borders.

However, attempts to make the yuan a world currency have already been noted. For example, in 2016 it was included in the basket of IMF reserve currencies. And it became an important event in the history of the state.

Despite the fact that the country is developing quite dynamically, according to experts, for the full-fledged status of the world reserve currency, the yuan lacks free convertibility and a floating exchange rate.

As you already understood, this is the main problem. And still, interest in the Chinese national currency only grows over time. Not so long ago, Germany and France replenished their reserves with the yuan.

The key role of the US dollar is not in doubt. It is this ratio, paired with the yuan, that is the most significant. But today, the People's Bank of China is already monitoring the exchange rate of its currency relative to means of payment and other states. And this slightly reduced the role of the US currency in its development.

Yuan Management Tools

Most often, in this matter, central banks use key interest rates. The higher it is, the more cash injections go into the national currency. But the PRC has a number of its own unique differences. Here the emphasis is on reservation rates. It is also a very good way to influence fluctuations in the value of the national currency. It is they who determine the size of the reserves of commercial banks in the Central Bank. If rates go up, lending goes down. The use of this tool is quite safe for the stability of the country. Such a method also means the possibility of Beijing's attempt to stimulate the economy without much pressure on the yuan.

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