Currency Control and Its Impact on Trade: China's Approach and the Consequences of Losing Control

Currency control is a crucial aspect of international trade, and China's method of managing its currency has been a topic of much debate. This article will discuss the importance of currency control, China's method of achieving it, and the potential consequences if they were to lose control over their currency.

Currency Control and Its Impact on Trade: Currency control refers to a government's intervention in the foreign exchange market to manage the value of its currency. By controlling the exchange rate, a country can influence the cost of its exports and imports, thus impacting its balance of trade. A lower valued currency makes a nation's exports more competitive, as they become cheaper for foreign buyers, while imports become more expensive. This stimulates domestic production and consumption and can help maintain a positive trade balance, which is essential for a country's economic growth.

China's Method of Currency Control: China has employed a unique method to control its currency, the Renminbi (RMB). Rather than allowing market forces to determine the exchange rate, the Chinese government sets a daily reference rate for the RMB against other major currencies like the US Dollar. The government then actively intervenes in the foreign exchange market, buying and selling currencies as needed to maintain this reference rate.

To keep the value of the RMB low, China accumulates large amounts of foreign reserves, mainly in US Dollars, to maintain its exchange rate at the desired level. This process involves selling RMB and buying foreign currencies, thus increasing the supply of RMB and decreasing the supply of foreign currencies in the market. As a result, the value of the RMB remains low relative to other currencies, giving China a competitive advantage in international trade.

If China were to lose control over its currency, several consequences could arise:

1. Currency appreciation: Without intervention, the RMB could appreciate due to market forces, making Chinese exports more expensive and less competitive in the global market. This could lead to a decline in export revenues and a slowdown in the country's economic growth.

2. Increased import competition: An appreciating RMB would make imports cheaper for Chinese consumers, leading to increased competition for domestic industries. This could result in job losses and a decline in domestic production as local businesses struggle to compete with cheaper imports.

3. Inflation: A stronger RMB could lead to increased inflation, as the cost of imported goods and services would decrease. This could cause the prices of domestically produced goods and services to rise, potentially leading to reduced purchasing power for consumers and a decline in economic growth.

4. Capital flight: A loss of currency control might lead to increased uncertainty in the Chinese economy, causing investors to move their capital out of the country in search of more stable investment opportunities. This could lead to a decline in investment and economic growth in China.

Currency control is a crucial aspect of international trade, and China's approach to managing its currency has generated much debate. While this strategy has allowed China to maintain a competitive edge in global trade, it is not without costs and risks. As the world's second-largest economy continues to evolve, the consequences of losing currency control could have significant implications for both China and the global economy.