Did China Cancel the US Dollar Peg?

Did China Cancel the US Dollar Peg?

The rumors went viral on social media that China has decided to cancel the US Dollar peg in the stock exchange transactions. We have investigated the authenticity of these rumors in the article. The reach of social media is being misused for the spread of fake news especially during the Covid-19 outbreak when people have become highly active on social media.

Claim- China cancels dollar peg

The message circulated on social media claimed that China cancels the dollar peg. It said that China is set to cancel its currency peg with the dollar in the stock exchange transactions. The purpose of this decision was economic welfare and protection against the US economy. However, there is no official announcement from the Chinese authorities to support this claim. The viral message was linked to the launch of state-run digital currency by People Bank of China (PBOC).

How true is the claim?

Is the claim true?

The claim is false.

According to a report by South Morning China Post, China’s Central bank is considering to re-peg Yuan’s exchange rate against the US dollar. The Covid-19 outbreak has caused huge damage to the Chinese economy and all the other economies in the world. To stabilize and protect the economy from further loss, the bank was planning for this move.

PBOC sets exchange rates in its daily routine. It depends on various factors but the bank has to set an exchange rate which is not weaker, so that value of exports doesn’t go down. It needs to provide currency stability as it did in the previous financial crisis of 1997 and 2008 to preserve the achievements of exchange rate reforms since 2005.

Chinese Currency System

The Chinese companies accept the payments in dollar currency for the exports. The firms deposit dollars in the banks and take yuan in exchange for the currency. The local banks deposit dollars in the People Bank of India in foreign exchange reserves.

When the PBOC collects more dollars, it reduces the supply of the dollars to put more pressure on Yuan. It regulates the supply of dollars to keep the exchange rate of yuan in check. So, PBOC acts as a mediator between banks and US dollar exchange in the market.

However, we should note that the launch of digital currency did not indicate China’s move to cancel the dollar peg.

Now let us understand how the digital currency would work?

China will conduct a pilot test of trialing payments in the month of May. The central bank has planned for the development of e-RMB. It will become the first digital currency operated by a major economy.

Then it will be pegged to the yuan.

However, there has always been a rivalry between the Chinese and US economy to become the world’s largest economy.

Chinese Yuan V/s US Dollar

The rivalry between the US and China has been there for a long time. China started the journey of becoming a global transition from the year 1978. From 1980 to 2010, China has achieved an average growth rate of 10% year on year. The Chinese economy grew five times from 2003 to 2013 making it the world second-largest economy.

The large scale exports accelerated the massive growth of the Chinese economy. We all are aware of the fact that how Chinese products have been ruling the majority of the markets (especially India) all over the world.

The major component of Chinese economic policy is managing yuan’s exchange rate to benefit its exports. The issue of yuan revaluation has implications on not just the world’s two largest economies but also the global economy. It also affects the person on an individual level for personal well being, expenses, investments, and job prospects.

Thus, there would be a huge impact on the global economy and especially India if China decides to cancel the dollar peg.

You can also check our blog on upcoming Reliance Rights Issue.

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