Analyzing China's Currency vs. US Dollar: Macroeconomics Project

This project offers a macroeconomic analysis of the US-China currency exchange rate, focusing on the valuation of the Chinese Yuan (Renminbi) against the US Dollar. It examines the impact of the US-China trade war on currency depreciation, trade, and investment. The analysis includes a review of the historical exchange rate over the past five years, highlighting the decline in the Yuan's value. The project explores the effects of currency devaluation on both the Chinese and US economies, including the impact on domestic suppliers, manufacturing industries, and investor sentiment. It also discusses the role of government intervention and economic reforms in addressing the challenges posed by the trade war and currency fluctuations. The project further delves into the macroeconomic factors influencing foreign exchange and investment, providing insights into the slower GDP growth rate in China and potential currency wars between the two nations. The project concludes with an overview of the current economic climate and the future outlook for both countries, offering a comprehensive understanding of the complex relationship between the US and Chinese economies.

Running Head: Macroeconomics 1
Macroeconomics
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Running Head: Macroeconomics 2
Table of Contents
Introduction......................................................................................................................................3
Analyze the Chinese currency compared to the US currency.........................................................3
Macroeconomic analysis related to the foreign exchange and investment......................................5
Conclusion.......................................................................................................................................6
References........................................................................................................................................7

Running Head: Macroeconomics 3
Introduction
In terms of macroeconomics, exchange rate shows the conversion rate of exchanging one currency for the other
currency of other country. As per the statement of Özer (2019), the exchange rate of the foreign currency
between the countries is determined by the experts of the foreign exchange market. During the participation in
the international trade, both the buyers and the sellers need to have in depth knowledge about the foreign
exchange rate. The investors mentioned the valuation of the US Dollar has been gaining confidence compared
to the other countries. On the other hand, some of the emerging economies and the oil exporting economies
such as Russia, China and Brazil are also strengthening their currency valuation. This paper would shed the
light to find out the currency exchange valuation of Yuan respect to the US Dollar.
Analyze the Chinese currency compared to the US currency
It is noted that for measuring the valuation of the countries, the US Dollar is considered as the standard value
since it is the widely used for most of the global trade transactions among the nations. As opined by Liu & Woo
(2018), since the year 1944, the US Dollar has been considered as the reserve currency of the world. This
decision was taken in the Bretton Woods Agreement. In this section, the currency valuation and the exchange
rate of the Chinese currency against the US Dollar would be going to be discussed. In this regard, the exchange
rate of China in the next five years would be analyzed.
The national currency of China is known as Yuan or Renminbi, and the exchange rate of the currency of the
nation is fixed. This refers that the value of the Yuan exchange rate is pegged and accepted by the monetary
authority of the other countries. In addition, the Yuan currency of China is able to keep the economy
competitive and hence, it has been playing an essential role in the economy of the nation. Since, China is one of
the largest trading partners of the US; therefore, China is concerned about the controlling of the price level of
the exportable. More specifically, the Chinese exporters target to set and charge the price of the exportable in
such a way, so that the price level would be lower compared to the manufacturers and the suppliers of the US.
In this context, it can be said that the Communist Party of China has strong involvement in controlling the
Central Bank of the country before taking any decisions for the economy. He et al., (2019) mentioned that the
funds by FXI is identified as the largest holdings of three organizations of China and these are Commercial
Bank of China, China Construction Bank Corp and Tencent Holdings. These major shares by FXI prove that
some of the large investors hold their certain percentage of funds into the Chinese businesses as well as in the
Chinese organizational operations, even after trade war and the currency devaluation of China.

Running Head: Macroeconomics 4
Figure 1: The US-China currency exchange rate of last five years
(Source: XE Currency Charts, 2019)
As per the above diagram, it can be observed that the currency depreciation of China to the US Dollar has been
increased sharply with the passage of time. This refers that the valuation of money of the US dollar has been
maximized respect to the currency of China. The primary reason of the decrease of Yuan fall in China respect to
the US is to protect the domestic suppliers of the US. Since China started to sell products in the US market in
lower prices than the US suppliers, hence, it directly affected their businesses and the sales percentage. In order
to protect the domestic producers and the suppliers, the US government has started to impose tariff rate on the
price of the importable from China and consequently, the value of Yuan has declined by 2% immediately
(Lukin, 2019).
Devaluation of Chinese currency has adverse impact on the investors of the country. With the increasing of
restriction of Chinese importable to the US economy, the production of the manufacturing industry of China has
been affected. Consequently, the investors feel reluctant to invest in the country. They become skeptical about
their investment. On the contrary, Chen, Chen & Dondeti (2019) argued that though the US-China trade war
affect the investors willingness to invest in the businesses, however, some of the Exchange Traded Fund (ETFs)
of China have been earned positive returns. For instance, Direxion daily CSI 300 received positive return even
after decreasing of stock price level and it gained in 2018 approximately 23.45%. In addition, the largest global
fund that is the iShare China Large Cap (FXI) has invested in the country. FXI targets to build a trade
association with Hong Kong instead of participating in trade with the US.

Running Head: Macroeconomics 5
Macroeconomic analysis related to the foreign exchange and investment
As per the above discussion, it can be observed that the currency depreciation of China against the US Dollar
has negative impact on the economy and hence, the economy has been experiencing slower GDP growth rate.
Yılmaz (2019) cited that after the imposition of tariff on the importable of China to the US, the net export and
the gains from trade has been declined of the country.
Figure 2: Conversion rate of China has been rising
(Source: Federal Reserve Bank of St. Louis, 2019)
As per the above diagram, it is clearly observed that in 2015, 1 USD was equivalent to 6.25 Yuan, while the
current conversion rate of the Yuan against the US Dollar is 7.09. This is clearly evident that the US- China
trade war negatively affects the net export and the gains from trade of China. In the opinion of Balding (2019),
China has been experiencing the slowest growth in the current years within the last three decades. With the
decreasing of exports to the major trading partner the US, the manufacturing sectors of China have been started
to shut down. Consequently, a number of Chinese have lost their jobs, who were engaged with the
manufacturing sector. Apart from the Chinese economy, the falling of Yuan currency due to the trade war also
affects the US economy. As opined by Stankiewicz (2019), the damage of the US economy is more than the
economy of China. Based on the discussion, it can be anticipated that both the US and China can move towards
the currency war. In order to stabilize the economic downfall, the President of China, Xi Jinping has decided
and committed to take economic reform. It may help to deal with the economic challenges of the current era and
the problem related to the higher unemployment rate of China can also be controlled.

Running Head: Macroeconomics 6
Conclusion
As per the discussion, the conclusion of the paper can be drawn easily. In this respect, it can be inferred that due
to the trade war between the US and China, the devaluation rate of China has been declined. Therefore, the
foreign exchange rate of China is high against the US Dollar in 2019 than the five years ago. It directly affects
the economy of China due to the gain from lower net export. On the other hand, the manufacturing industry of
China is in the greatest trouble. The trade war not only affects the Chinese economy, but also the US economy
suffers the most. However, for dealing with the economic downturn, the government of China has planned to
implement new reform in the economy.

Running Head: Macroeconomics 7
References
Balding, C. (2019). What’s Causing China’s Economic Slowdown. Retrieved from
https://www.foreignaffairs.com/articles/china/2019-03-11/whats-causing-chinas-economic-
slowdown
Chen, A. W., Chen, J., & Dondeti, V. R. (2019). The US-China trade war: dominance of trade or
technology?. Applied Economics Letters, 1-6.
Federal Reserve Bank of St. Louis. (2019). China / U.S. Foreign Exchange Rate (EXCHUS). Retrieved from
https://fred.stlouisfed.org/series/EXCHUS
He, R., Zhu, D., Chen, X., Cao, Y., Chen, Y., & Wang, X. (2019). How the trade barrier changes environmental
costs of agricultural production: An implication derived from China's demand for soybean
caused by the US-China trade war. Journal of Cleaner Production, 227, 578-588.
Liu, T., & Woo, W. T. (2018). Understanding the US-China trade war. China Economic Journal, 11(3), 319-
340.
Lukin, A. (2019). The US–China Trade War and China's Strategic Future. Survival, 61(1), 23-50.
Özer, A. C. (2019). The Effect of the US-China Trade War on Global Trade. In International Trade Policies in
the Era of Globalization (pp. 56-70). IGI Global.
Stankiewicz, K. (2019). US economy being hit harder by the trade war than China, says influential Asian
financier. Retrieved from https://www.cnbc.com/2019/10/14/pag-chairman-weijian-shan-us-
being-hit-harder-by-trade-war-than-china.html
XE Currency Charts. (2019). XE Currency Charts: USD to CNY. Retrieved from
https://www.xe.com/currencycharts/?from=USD&to=CNY&view=5Y
Yılmaz, Ö. T. (2019). USA-China Trade Wars: Back to Protectionism in World Trade. In International Trade
Policies in the Era of Globalization (pp. 71-93). IGI Global.