Question

In order to maintain the desired exchange rate value of its currency, the yuan, China sells a great deal of yuan on the foreign exchange market. What does it tend to do with the dollars it receives from many of these sales?

Answer 1

China tends to accumulate the dollars it receives from selling yuan on the foreign exchange market in its foreign exchange reserves. These reserves are used to stabilize the yuan, make investments, and facilitate international trade.

Step-by-step explanation:

In order to maintain the desired exchange rate value of its currency, the yuan, China tends to sell a great deal of yuan on the foreign exchange market. When China sells yuan, it receives dollars in return. To manage the exchange rate, China typically accumulates these dollars in its foreign exchange reserves.

China's foreign exchange reserves are used for various purposes, including:

1. Stabilizing the value of the yuan: By accumulating dollars, China can intervene in the foreign exchange market and buy yuan, increasing its demand and thus supporting the value of the currency.
2. Investments: China can use its foreign exchange reserves to invest in foreign assets, such as government bonds and stocks, in order to generate returns.
3. International trade: The accumulated dollars can be used for international transactions, to pay for imports or settle debts with other countries.