Dollar to Yuan Conversion and History

How a Tiny Change in the Yuan Can Panic Investors

yuan dollar
China keeps the value of its currency, the yuan, lower than the dollar to increase its exports. Photo: george jurasek/Getty Images

Definition: The U.S. dollar to Chinese yuan conversion rate tells you how many yuan you can buy for one dollar. It explains the value of the yuan (also called renminbi) compared to the dollar.

For example, the dollar to yuan exchange rate was 6.7008 on October 1, 2016. That means you would receive  6.7 renminbi in exchange for one dollar. When the dollar to yuan exchange rate rises (the number gets closer to 7), it means the dollar strengthens and the yuan weakens.

That's because the stronger dollar can buy more yuan. The dollar to yuan conversion has become one of the most widely-watched exchange rates. These two countries have the world's largest economies.

What Affects the Dollar to Yuan Conversion?

The dollar to yuan conversion is influenced by three forces. The first is the relative strength of the two country's economies. For example, the dollar's value strengthens during a global crisis. Investors purchase dollars and Treasury notes as a safe haven. The large U.S. debt-to-GDP ratio could threaten the dollar's value in the future.

The second is supply and demand. The dollar, as the global reserve currency, is always in high demand. That's because all commodities contracts, most notably those for gold and oil are priced in dollars. Almost half of all international transactions are made in dollars. The United States meets this demand by selling Treasury notes .

These are as good as dollars since they can be instantly converted into dollar bills at any time.

The third is the yuan's peg to the dollar. The dollar to yuan value had traditionally been a fixed exchange rate. It's been tightly controlled by China's central bank, the People's Bank of China (PBOC).

It never allowed the yuan to rise 2% above or 2% below a basket of currencies that was mostly the U.S. dollar. That rate was around 6.25 yuan per dollar. China's economy had been dependent on this rate to control export prices and keep Chinese-made products competitive.

There is now a fourth and artificial force. Hedge funds, like Hayman Capital Management, are shorting the yuan and the Hong Kong dollar. They are betting that the yuan will fall 40% in the next three years against the dollar. That puts downward pressure on the yuan's value. The PBOC must purchase yuan, or impose other restrictions, to keep the yuan pegged to the dollar. (Source: "U.S. Hedge Funds Bet Against China," WSJ, February 1, 2016.)

Many traders and businesses had hedged their exposure to the yuan. Since the yuan hadn't changed much in value in prior years, they thought they were protected. If the yuan started trading freely, it could damage their profitability

The PBOC is relaxing that control as part of China's economic reform.

On January 6, 2016, it allowed the yuan to fall to 6.5567. It had been at 6.5084 on January 1, 2016. That uncertainty helped send the Dow down 400 points. By the end of that week, the yuan had fallen to 6.5853 and the Dow was down more than 1,000 points. For more, see Dow Jones Closing History.

Prior to that, on August 11, 2015, the PBOC started the world's foreign exchange markets. It announced it would use a reference rate that was equal to the yuan's previous day closing value. The bank would also take into account supply and demand and the movement of major currencies in setting the so-called fix rate.

Here's how it worked. The PBOC posted the new fix rate at 9:15 am. It was nearly 2% weaker than Monday’s close of 6.2. Trading started at 9:30. The PBOC normally allows the yuan to bounce around within a 2% range before it intervenes. Therefore, it did nothing since the yuan's value remained within, falling almost 2%, to 6.3232 per dollar. The next day it fell 1.0% to 6.3845. (Source: "Yuan Is Now Market Driven," Barron's , August 15, 2015)

That's when the PBOC intervened to stop the descent.  It bought yuan from the nation's banks, reducing its supply and raising its value. It replaced the yuan with U.S. dollars, flooding the market and lowering its value. By August 14, the yuan recovered 0.1% to 6.3908 per dollar. Altogether, the yuan fell 3% against the dollar.  

Why the PBOC Devalued the Yuan

The PBOC wanted the yuan to be driven more by market forces,  even if it meant greater market volatility. The International Monetary Fund (IMF) required this for the yuan to be considered an official reserve currency. (Source: "The Yuan and the SDR," The Economist, August 5, 2015) 

The PBOC also wanted to stop cash from leaving the country. In July, China's stock market fell dramatically. Investors fed up with the volatility, wanted to invest outside the country. To do so, they needed to exchange their yuan for U.S. dollars. Chinese banks lost $39 billion in July, the worst monthly decline since 1998.

The PBOC used its U.S. dollar reserves to meet the demand. Since it was exchanging the reserves for yuan, this lowered China's money supply. That drives up interest rates and slows economic growth. The only way the PBOC could set things right was to let the dollar to yuan exchange rate drop. (Source: "Cash Keeps Exiting From China, Date Show," WSJ, August 17, 2015)

Many analysts warned the yuan would fall another 10%, and that China was starting a currency war. In fact, the PBOC did not want the yuan to devalue much more. Many Chinese businesses had taken out loans in U.S. dollars. They took advantage of record-low interest rates, thanks to the Fed's Quantitative Easing. The cost of paying back these loans would rise as the yuan's value fell. (Source: "You Say Yuan a Revolution," Barrons, August 17, 2015)

The PBOC now has the freedom to allow the yuan to slowly evolve toward a floating exchange rate. That will give the bank more flexibility with monetary policy. It's another step toward promoting the yuan to replace the dollar as the world's global reserve currency.

On October 10, the PBOC told investors that it would continue to let the yuan be affected by market forces. It also reassured them that the movement would not be sudden. (Source: "Beijing Will Be Flexible on Yuan," WSJ, October 10, 2015.)

History

As the chart below shows, China kept the yuan at about the same value until 2005. That's when Congress accused China of starting a currency war. President Bush named Hank Paulson as Treasury Secretary to ask China to strengthen its currency. This would make its exports more expensive compared to U.S. products. 

Chinese leaders complied, even though it would slow China's economic growth. They wanted to keep the economy from overheating, creating inflation. On January 26, 2014, the yuan reached an 18-year high. That meant one dollar could only buy 6.0487 yuan. 

Since 2005, the yuan rose 33% against the dollar. That's a healthy rate of increase -- any more would have negative economic impacts for China. The country is desperately trying to keep its 1.3 billion people employed to raise their standard of living. China's leaders are afraid they will revolt if growth isn't fast enough. 

Despite the yuan's controlled rise, many analysts still thought the Chinese government kept the yuan artificially low. They said it needed to rise 30% more in value. They argued that if China allowed the yuan to float freely, it would be more valuable than the dollar because of China's strong economy. 

Since the 2014 high, China's central bank has allowed the yuan to weaken again to boost its exports. The dollar rose 15% against most major currencies in 2014, dragging the yuan with it. The yuan was overvalued compared to its other trading partners that weren't pegged to the dollar. Since 2005, it had risen 55.7% adjusting for inflation.  (Source: "With Yuan Move, China Take U-Turn," WSJ, August 11, 2015) 

                                History of Dollar to Yuan Value Since 2000

Dollar to Yuan (on the 1st day of the year)PBOC Actions
2000  8.2798Basically no change in the yuan through 2004.
2001  8.2779
2002  8.2766
2003  8.2800
2004  8.2769
2005  8.2765Strengthened yuan 2.5%.
2006  8.0702Strengthened yuan 3.3%.
2007  7.8051Strengthened yuan 6.5%. 
2008  7.2946Up 6.5% until Oct.
2009  6.8225Yuan stable during the financial crisis.
2010  6.8273Strengthened yuan 3.5%
2011  6.5895Yuan gained 4.5% in value.
2012  6.2940Strengthened yuan 1.0%.
2013  6.2301Yuan rose 2.9%. U.S. trade deficit with China hit record.
2014  6.0504Reached 18-year high in Jan. 
Jun  6.2548Dollar rose 15%. Weakened 2.5%. 
Dec  6.149
2015  6.2046Remained within 2% trading range until August.
Price on 1st day of month 
Feb  6.2594 
Mar  6.272 
Apr  6.1976 
May  6.2018 
Jun  6.1985 
Jul  6.2008 
Aug 1  6.2087 
Aug 10  6.2094 
Aug 11  6.3232Relaxed peg and yuan falls.
Aug 12  6.3845
Aug 13  6.3982
Aug 14  6.3908Strengthened.
Sep  6.363
Oct  6.354
Nov  6.3180
Dec  6.3883Weakened to improve exports and limit capital flight.
2016  6.5084
Feb  6.5844
Oct  6.70086-year low.

(Source: "FRB H.10 Historical Rates for the Chinese Yuan Renminbi," Federal Reserve. OANDA Currency Converter)

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