Introduction
China is one of the fastest-growing economies in the global landscape. Globalization and international trade offer the country a wide range of markets in its export-oriented economy. Although China’s currency rates and hedging regimes have played a significant role in its growing economy, it has been under scrutiny and controversy related to currency manipulation.
Other players in the global economy have further criticized China’s practices, terming them unfair since they are likely to give the country an undue advantage in the export realm compared to other countries. The country has, however, defended its economic policies and hedging regimes, terming them necessary for the stability and sustainability of the economy. Although China’s exchange rate strategies, hedging, and economic regimes are instrumental in economic growth, they are likely to cause political tensions, exchange rate risks, and trade tensions, which may jeopardize its international trade relations.
Exchange Rate, Economic, and Hedging Policies
Huge Government Intervention
In a globalized economy, countries are expected to offer fair trade opportunities to local and international investors. One essential strategy that China applies to maintain an advantage over foreign investors is ensuring that it offers considerable subsidies to its businesses. Consequently, international investors in the country face unhealthy competition and need help exporting effectively. Although the policy helps China’s local industry export more and increase its GDP, it will likely cause tensions among the countries whose investors have been subjected to unfair competition (Kapustina et al., 2020). The country may suffer economic sanctions in the long run, as the investors who are treated unfairly will seek partnerships and trade relations with other countries.
Capital Control and Manipulation of the Yuan
Capital controls are strategies a country can use to maintain the flow of resources in and out of international trade. China has been imposing capital restrictions in the past decade to ensure that it exports more and imports less, to ensure the Yuan is not affected. Further, the country has limited the amount of money foreign investors can invest in the country and restricted investors from working in specified sectors (Weinhardt & Ten Brink, 2020).
Most nations whose investors are not allowed to invest in China will likely seek trade relations with other countries that do not limit investment. The government also applies policies to manipulate the Yuan by maintaining an artificially low value to make its exports cheaper. Limiting capital flow from foreign investors and manipulating the Yuan to make exports cheaper helps maintain a stable exchange rate and accelerate its economic growth.
China leverages the forces of demand and supply to manipulate the Yuan’s value in the global landscape. For example, it buys large amounts of foreign currencies, such as the dollar and the sterling pound, increasing its global supply (Weinhardt & Ten Brink, 2020). As the Yuan becomes widely available in the global financial market, it becomes cheaper than other currencies. Consequently, the country’s export goods become cheaper than other goods. As a result, the country gains an undue advantage over other nations and improves its trade relations.
Relationship Between the Yuan and the Dollar
Chinese economic policy developed a pegging relationship with the dollar, which challenges the country’s economic partners as the exchange rate increases. Although pegging the Yuan to the dollar gives it more stability and makes its exports more profitable, its trade partners argue that the currency must float freely in the economy (Kapustina et al., 2020). Further, the moves give the country short-term stability but affect the currency’s ability to appreciate. The currency’s relationship with the American dollar poses a double threat, causing complaints from international trade partners and the Yuan’s inability to appreciate.
Risks of the Policies and Hedging Regimes
Tensions in International Trade
China’s economic strategies to gain a competitive advantage are likely to cause tensions in international trade. In a free market, all partners are expected to offer a level playing field for trade to be effective. However, when other trade partners feel they are cheating, they will likely cut off trade with the country to attract new partners. The United States once issued sanctions over what was termed unfair practices by China (Kapustina et al., 2020).
The US claimed China manipulated its currency and engaged in intellectual property theft to gain a competitive advantage. The sanctions negatively impacted Chinese business, which is risky and may hurt the country’s economic growth. Other nations may also introduce sanctions once they believe their trade partner is using unfair means to gain a competitive advantage globally.
Political Risk and Uncertainties
The Chinese primary strategy in maintaining the currency’s stability is maintaining state control over the economy. Consequently, it makes policies to restrict the flourishing of foreign investors by minimizing capital flows and restricting investment in profitable sectors of the economy. The primary goal of international trade is to make all nations conduct business fairly and thrive.
Political goodwill and stability will be maintained if all the countries apply fair practices to trade (Weinhardt & Ten Brink, 2020). However, as China uses hedging and exchange rate strategies that hurt other countries and limit their growth, the countries may revolt and cut their trade relations with China. A lack of political goodwill will likely jeopardize China’s ability to trade internationally, and its growth may be hindered.
Massive Capital Outflows
Capital outflow is the movement of investment outside a country due to stagnation. When international investors lose confidence in a country due to restrictions, they leave to invest in other countries that offer a conducive environment for economic growth (Weinhardt & Ten Brink, 2020). Foreign investment has a vital role in a country’s economy.
Examples of such roles include boosting employment, increasing revenue to the government through taxes, and increasing people’s purchasing power. The exit of foreign investors due to unfair trade practices is likely to hurt the economy (Kapustina et al., 2020). Although China’s capital flow policies stabilize its economy in the short term, they are likely to have a significant impact in the long term, as the exit of the investors may cause the country’s economy to collapse.
Conclusion
China is an emerging global economic giant courtesy of its aggression in international trade. It uses policies that stabilize its economy by gaining an unfair advantage over other nations. The country’s unfair strategies to grow its economy are currency manipulation, excessive capital control, colossal government intervention, and pegging the Yuan to the American dollar. The strategies enable China to trade more effectively globally and make more profits. However, since the policies jeopardize other countries’ chances of economic growth, China is likely to suffer capital outflows, political risks, and tension, which will jeopardize the country’s economy.
References
Kapustina, L., Lipková, Ľ., Silin, Y., & Drevalev, A. (2020). US-China trade war: Causes and outcomes. SHS Web of Conferences, 73(1), pp. 10-16. Web.
Weinhardt, C., & Ten Brink, T. (2020). Varieties of contestation: China’s rise and the liberal trade order: [Contribution to forum: China’s rise in a liberal world order in transition]. Review of International Political Economy, 27(2), 258-280. Web.