Dollar to Yuan Conversion and History
How a Tiny Change in the Yuan Can Panic Investors
For example, the dollar to yuan exchange rate was 6.2645 on February 7, 2018. That means you would receive 6.2 renminbi in exchange for one dollar. When this number gets closer to seven, it means that the dollar to yuan exchange rate is rising. It also means that the dollar is strengthening and the yuan is weakening. 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. That's because these two countries have the world's largest economies.
Three Forces that Affect the Dollar to Yuan Conversion
Three forces influence the dollar to yuan conversion. The first is the relative strength of the two countries' 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-gross domestic product 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. China's economy had been dependent on this rate to control export prices and keep Chinese-made products competitive. The People's Bank of China never allowed the yuan to rise 2 percent above or 2 percent below a basket of currencies that was mostly the U.S. dollar. That rate was around 6.25 yuan per dollar until 2016.
Why China Devalued, Then Strengthened, the Yuan
In July 2015, 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 wanted to stop cash from leaving the country.
On August 11, 2015, the PBOC startled the world's foreign exchange markets. It announced it would use a reference rate that was equal to the yuan's previous day's 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 a.m. It was almost 2 percent weaker than Monday’s close of 6.2. Trading started at 9:30. The PBOC typically allows the yuan to bounce around within a 2 percent range before it intervenes. So it did nothing since the yuan's value remained within range.
The next day the yuan fell 1.0 percent to 6.3845. 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 percent to 6.3908 per dollar. Altogether, the yuan fell 3 percent against the dollar.
Many analysts warned the yuan would fall another 10 percent. They believed 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 U.S. Federal Reserve's program of quantitative easing. The cost of paying back these loans would rise as the yuan's value fell.
On October 10, 2015, the PBOC told investors it would continue to let the yuan be affected by market forces. It also reassured them that the movement would not be sudden. The PBOC wanted to allow the yuan to evolve slowly toward a floating exchange rate. That would give it 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 January 6, 2016, the PBOC further relaxed its control of the yuan as part of China's economic reform. It allowed the yuan to fall to 6.5567 from 6.5084 on January 1, 2016. The uncertainty over the yuan's future helped send the Dow down 400 points. By the end of that week, the yuan had fallen to 6.5853, sending the Dow down more than 1,000 points.
The PBOC wanted the International Monetary Fund to designate the yuan as an official reserve currency. The IMF required the yuan to be driven more by market forces, even if it meant greater market volatility.
The central bank's policy change caught global markets off guard. 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.
That uncertainty created a fourth and artificial force. In 2016, hedge funds like Hayman Capital Management began shorting the yuan and the Hong Kong dollar. They bet that the yuan would fall 40 percent by 2019. That put downward pressure on the yuan's value. That forced the PBOC to buy more yuan and impose other restrictions to keep the yuan at its target.
In 2017, the yuan rose 8 percent. The PBOC does not want to be labeled a currency manipulator. President Trump threatened to label China as such during the 2016 presidential campaign.
As the chart below shows, China kept the yuan at about the same value until 2005. That's when the U.S. 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 percent 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 percent 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 percent 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 percent adjusting for inflation.