It's a well-known fact China intentionally manipulates the value of its currency. What's less understood is exactly how and why it does so.
For years, analysts and commentators have been calling on the U.S. government to do something about this. "China's policy of keeping its currency, the renminbi, undervalued has become a significant drag on global economic recovery," Paul Krugman argued in 2010. "Something must be done."
Although the controversy faded soon after Krugman's plea, it resurfaced at the beginning of this week. On Monday, the Chinese central bank weakened its daily reference rate for the renminbi (which is also known as the yuan) by the largest percentage in more than a year and a half.
The reason? According to The Wall Street Journal, "Beijing is seeking to make it clear to investors that the yuan isn't a one-way bet, laying the groundwork for allowing the currency to trade more freely." It was, in other words, a naked attempt to stamp out unfriendly currency speculators.
For people who don't follow the currency markets, the revival of this debate begs two questions: Why does China manipulate the value of the yuan? And how does it do so? In the presentation below, Motley Fool contributor John Maxfield answers both.