NEW YORK (TheStreet) -- The contentious issue of Chinese manipulation of their currency is a hot topic among U.S. politicians. It's the case now, as it was when Mitt Romney and Barack Obama sparred over economic policy in debates in 2012. Politicians, economists and policy makers continue the debate.
But the latest U.S. Treasury Department report exculpated China of currency manipulation practices. However, the report indicated that the renminbi, China's currency, had appreciated at "an unusually slow rate" against other major currencies. (The renminbi is the currency as a whole, and the yuan is the equivalent of one unit, like a dollar is one American unit of money.)
During the course of 2013, it was clear that the renminbi had appreciated on a trade-weighted basis, but much slower than it should have.Chinese Current Account Surplus Drops Precipitously
The yuan gained 2.9% against the U.S. dollar last year, and the current account surplus in China dropped to 2.1% of GDP for 2013. This marks yet a further reduction in the percentage value of the current account surplus to the GDP. In 2012, the current account surplus in China was 2.3% of the GDP. In 2007, it was 10% of the GDP. It has been reported that Chinese foreign exchange reserves increased by $166 billion -- most of it coming in the form of U.S. government securities.
Note that all foreign currency earned in China must be exchanged at the People's Bank of China, which then delivers all the foreign currency to the central government. The State Administration for Foreign Exchange, or SAFE, then uses the exchanged foreign currency to buy foreign currencies, U.S. Treasury notes and foreign stocks.
While there is a clear government policy about what happens with foreign currency, it is less clear how this amounts to currency manipulation. The way relative currency values are determined is by supply and demand. Since no other entity in China has more leverage or clout than the People's Bank of China, it is safe to say that the bank's actions in the currency markets can have a direct and dramatic effect on the relative strength or weakness of the renminbi.Profiting Off Currency Fluctuations
Traders across the U.K. have long since been spread-betting on the British pound/Chinese yuan currency pair. There are myriad opportunities for short-term profit-taking on this and other currency pairs.
This type of trading activity is tax-free in the U.K. and is viewed as a viable investment alternative -- for both rising and falling markets. The prediction is made per point of movement in the currency market.
When the People's Bank of China purchases dollars or sterling -- and simultaneously sells Chinese yuan -- the demand for the U.S. dollar and British pound increases and they grow in relative strength. Since the yuan is being sold, its value decreases and it can be maintained at an artificially low exchange-rate value.
The Chinese government can influence exchange rates by mandating policy for all foreign money exchanged in China. Some estimates peg the Chinese foreign exchange reserves at $3.5 trillion. This helps China to keep its own currency value depressed.
In China, it is the capital account surplus of foreign direct investment that keeps the country in the black. In a free-market system, the renminbi would appreciate sharply against other currencies.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.