Question

On September 3, 2003, the finance ministers of G7 industrialized countries endorsed "flexibility" in exchange rates, a code word widely regarded as an encouragement for China and Japan to stop managing their currencies. Both countries have been actively intervening in the foreign exchange market to weaken their currencies against the dollar and thereby improve their exports. China and Japan had been seen buying billions of dollars in U.S. Treasury bonds. The G7 statement prompted massive selling of the U.S. dollar and dollar assets. The dollar fell 2% against yen, the biggest one-day drop that year, and U.S. Treasury bonds saw a steep decline in value as well.

Required:
How did China managed to weaken its currency against dollar?

Answer 1

China is a mixed economy where private firms are co-owned by the government, and they are highly regulated. Also, only private firms that are friendly with government officials prosper. E.g. back in March, one of China's richest businessman criticized the government and its handling of the current health crisis, and he was thrown into jail and sentenced to 18 years in prison.

This results in the Chinese government having a lot of power to guide how Chinese corporations work. The Chinese government artificially undervalued the yuan by purchasing foreign securities (not only US bonds, but also European bonds). Even though China has a trade surplus, its currency didn't appreciate like a normal currency would. This allows Chinese products to be cheaper and more competitive.

Even when the Chinese government said that they (as the government) would stop purchasing foreign securities, they ordered Chinese companies to do so. At the end the result was the same, China balances its currency through purchases of foreign securities either directly or indirectly (through companies co-owned by the government).