US & World Economies World Economy How China Influences the U.S. Dollar By Kimberly Amadeo Kimberly Amadeo Kimberly Amadeo is an expert on U.S. and world economies and investing, with over 20 years of experience in economic analysis and business strategy. She is the President of the economic website World Money Watch. As a writer for The Balance, Kimberly provides insight on the state of the present-day economy, as well as past events that have had a lasting impact. learn about our editorial policies Updated on March 4, 2021 Reviewed by Charles Potters Reviewed by Charles Potters Charles is a nationally recognized capital markets specialist and educator with over 30 years of experience developing in-depth training programs for burgeoning financial professionals. Charles has taught at a number of institutions including Goldman Sachs, Morgan Stanley, Societe Generale, and many more. learn about our financial review board Fact checked by Julian Binder Fact checked by Julian Binder Julian Binder is a fact checker, researcher, and historian. They were the recipient of the North American Studies Book Prize (2016, 2017), and they have previous experience as an economics research assistant. They have also worked as a writer and editor for various companies, and have published cultural studies work in an academic journal. As a fact checker for The Balance, Julian is able to utilize their experience as an editor and economics research assistant. Their role as fact checker is to review articles for accuracy, update data as needed, and verify all facts by citing trusted sources. learn about our editorial policies Share Tweet Pin Email In This Article View All In This Article The People's Bank of China Why China Fixes the Yuan's Value to the Dollar How China Manages Its Currency The Changing Value of the Yuan How China's Economic Reforms Impact the Dollar Frequently Asked Questions (FAQs) China influences the dollar by buying U.S. Treasuries. Photo: China Photos/Getty Images China directly affects the U.S. dollar by loosely pegging the value of its currency, the renminbi, to the dollar. China's central bank uses a modified version of a traditional fixed exchange rate that differs from the floating exchange rate the United States and many other countries use. The People's Bank of China The People's Bank of China manages the yuan's value. It keeps it fixed to a basket of currencies reflecting its trading partners. The basket is weighted toward the dollar since the United States is China's largest trading partner. It keeps the yuan's value within a 2% range against that currency basket. On Aug. 11, 2015, the PBOC modified this peg. The change uses a "reference rate" that is equal to the previous day's yuan closing value. The PBOC wanted the yuan to be more driven by market forces, even if it meant greater market volatility. The International Monetary Fund (IMF) added the renminbi to its Special Drawing Rights basket, a supplement of official reserve currency for different countries. Why China Fixes the Yuan's Value to the Dollar China manages its currency to control the prices of its exports. It wants to make sure its exports cost less than other products when sold in the United States. Every country would like to do this, but few have China's ability to manage it so well. How China Manages Its Currency China's currency power comes from its many exports to America. The top categories are electrical machinery, machinery, and furniture and bedding. Also, many American companies send raw materials to Chinese factories for low-cost assembly. The finished goods are considered imports when the factories ship them back to the United States. That's how the U.S. trade deficit with China is profitable to American companies. For export transactions to United States companies/consumers, Chinese firms typically receive dollars as payment for their exports. These firms then deposit the dollars into local banks, in exchange for yuan, which can be used to pay their domestic workers and vendors. The local banks then send the dollars to China's central bank, the People's Bank of China (PBOC). The PBOC holds the dollars in its foreign exchange reserves and regularly adjusts these reserves by buying or selling dollars via foreign currency markets in exchange for yuan. By stockpiling dollars, the PBOC reduces the supply of dollars available for trade, putting upward pressure on the dollar and downward pressure on the yuan. By selling dollars, the PBOC effects the opposite result. It is important to note that the PBOC does not sit on cash reserves. It uses the dollars it accumulates to buy U.S. Treasuries, which are safe-haven assets that provide some incremental return over cash The Changing Value of the Yuan Market forces and China's currency management efforts can lead to notable fluctuations in the value of the yuan. For example, China's 2015 modification to its exchange rate allowed the yuan's value to fall from just over 6.1 yuan per dollar at the beginning of 2015 to just under 6.4 yuan per dollar in September of that year. To restore the yuan's value, the PBOC used its dollar reserves to buy yuan from Chinese banks. By taking the yuan out of circulation, the Bank raised the currency's value. At the same time, it lowered the dollar's value by putting more dollars into circulation. In January 2016, China further relaxed its control of the yuan. The uncertainty over the yuan's future contributed to the Dow falling by almost 1,500 points. The S&P 500 fell about 2.3%. By 2017, the yuan had fallen to its lowest point since 2008. But China wasn't in a currency war with the United States. Instead, it was trying to compensate for the rising dollar. Between 2014 and 2015, the dollar rose 11.8%. Because it was pegged to the dollar, the yuan followed it. China's exports became more expensive than those from countries not tied to the dollar. It had to lower its exchange rate to remain competitive. How China's Economic Reforms Impact the Dollar China's economy impacts the dollar's value in other ways. China's slowing economy is one reason why the dollar gained strength in 2014 and 2015. Another reason is the crash in China's stock market. Stock prices fell about 30% after hitting record highs on June 12, 2015. Companies listed on the Shanghai and Shenzhen stock exchanges asked to suspend trading. This was almost a quarter of all firms. China's Inflation China's leaders must slow economic growth to avoid inflation and future collapse. They've pumped too much liquidity into state-run companies and banks. In turn, they've invested those funds into ventures that aren't profitable. That's why China's economy must reform or collapse. But China must be careful as it slows growth. China's leaders could create panic as some of these unprofitable businesses shut down. China's economy has a large amount of corporate debt. Many of these loans are above the lending limits set by the central government. They aren't on the books and aren't regulated. They could all default if interest rates rise too fast or if growth is too slow. China's central bank must walk a fine line to avoid a financial crisis. China's mega-rich want to escape this threat. They are investing in U.S. dollars and Treasurys as a safe haven investment. China's leaders must be careful in devaluing the yuan to prevent more capital flight. At the same time, it can’t keep the yuan's value too high either. This will slow the economy too much and trigger capital flight just the same. Impact of China's Slowing Growth There is another reason China needs to be careful with slowing growth. Emerging market countries rely on exports to China to fuel their growth. As China's growth slows, it will hurt some of these trade partners more than others. As these countries’ exports slow, so will their growth. Foreign direct investment will drop as opportunities dry up. Slowing growth weakens these countries’ currencies. Forex traders may take advantage of this trend to drive currency values down more, further strengthening the dollar. Frequently Asked Questions (FAQs) Why is Chinese currency manipulation bad for the U.S.? When a nation's currency loses relative value, its exports become cheaper to other countries, and it typically sells more products. If China artificially reduces the value of its currency, it gives itself an unfair advantage in global trade. The Trump administration felt that these sorts of economic distortions contributed to the U.S. trade deficit with China. What is Chinese currency called? Chinese currency is called "renminbi," but the most common way to refer to the value of a Chinese transaction is in "yuan." The two terms are sometimes used interchangeably, but renminbi technically refers to China's currency, while yuan is a specific measurement of Chinese currency. Jiao (10% of a single yuan) and fen (10% of a single jiao) are smaller measurements of renminbi. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Federal Reserve Bank of New York. "China’s Evolving Managed Float: An Exploration of the Roles of the Fix and Broad Dollar Movements in Explaining Daily Exchange Rate Changes," Page 5. Federal Reserve Bank of Cleveland. "The Chinese Renminbi and the Fundamental Trilemma." International Monetary Fund. "IMF Adds Chinese Renminbi to Special Drawing Rights Basket." Office of the United States Trade Representative. "The People's Republic of China." Congressional Research Service. "China’s Currency Policy." Bureau of Labor Statistics. "Impact of the Strengthening Dollar on U.S. Import Prices in 2015." Center for Strategic and International Studies. "Is the Renminbi Undervalued or Overvalued?" U.S.-China Economic and Security Review Commission. "China’s Stock Market Collapse and Government’s Response," Pages 1-2. Brookings Institution. "What's the Difference Between the Renminbi and the Yuan? The Answer To This and Other Questions in 'Renminbi Internationalization.'"