China is taking the heat as a currency manipulator in the media around the world then and now for sometimes now. & nbsp; Named and shamed mainly by the USA from the times of the Obama Administration to till now, as if China has violated an international law. But in all actuality, it has played by the rules so far and as a matter of fact currency manipulation is a customary practice in international law which nations employ whenever they require and are able to do so.

Even though the Britton Wood Agreement has ended by the unilateral action of the USA in 1971 the financial institutions created through the said Agreement survived i.e. the Agreements constituting the International Monetary Fund and the World Bank. The IMF in co-operation with the World Bank is entrusted with the role of maintaining the balance of trade among nations. The U.S with its unique position within the IMF and World Bank has openly promoted the U.S Dollar as the most stable fiat currency for transacting trade between nations within the IMF forum. It created a strong demand for the U.S Dollar and strengthened its fiat value which in turn strengthened the economic stability of the U.S.

For a country importing goods into its economy a strong currency is very advantageous. America soon became the biggest importer of goods and services in the world and its GDP was measured in terms of consumption of goods and services rather than the total goods and services produced by it. To feed this consumption China emerged as a hub for producing goods and earned the nickname the Worlds Factory. China gradually reformed itself into a free open market and initially capitalized on its cheap labor to produce goods at comparative prices and became the manufacturing hub of many multinational companies, many of them based in the USA.

The status quo of China as the World Factory meant it has become an import-oriented economy maintaining an increasingly strong trade surplus compared to other countries. Inevitably China's biggest import market was the United States. With increasing imports from China and other countries, the possibility for the U.S to run into a trade deficit was also inevitable. The strength of the U.S Dollar is not helping the U.S to increase its exports. The U.S Treasury and the U.S Federal Bank can devalue the U.S Dollar by withdrawing its treasury bonds or by printing money to increase its circulation. But artificially devaluing the U.S Dollar means there will be less returns for countries who have invested in the U.S by way of purchasing its treasury bonds which are currently giving a stable return to its investors and is also considered as a safe investment which is ironically helping the U.S Government to finance its ever increasing public debts including the bludgeoning trade deficit it has with other countries. & nbsp; An artificial devaluation of the U.S Dollar will prompt an immediate exit of investment from U.S Treasury Bonds and other financial markets in the USA. Leaving the U.S Economy unable to service its public debt and the trade deficit leading to the end of the world economy as we know it.

In complete contrast unlike the United States, China as a net importer of goods around the world has to maintain a weak currency to remain competitive. With no external debt and a trade surplus, China can afford to devalue its currency as enabled by international customary practices. But how does China devalue its currency? What factors may increase its value.

Many countries have chosen to purchase Chinese exports with Chinese Yuan or Renminbi its own currency after it was recognized as one of the important currencies in which the IMF would be transacting its business due to China's increasing economic cloud within the organization. This new demand for Chinese Yuan outside the Chinese territory will intern increase its value as per the supply and demand rule. This would make Chinese exports more expensive compared to its competitors. With increasing labor cost China doesn't have any other options other than to devalue its own currency.

The method adopted by Chinese policy makers to achieve this objective is to buy the U.S Dollar from the open market. China as the World Factory is also one of the biggest holders of U.S Dollars which it has earned through majority of its exports in exchange for U.S Dollars with other nations. The established monetary policy in China is to collect all the U.S Dollars that come into the mainland and circulate back into the United States by purchasing U.S Treasury Bonds in U.S Dollar. This increased demand for U.S Treasury Bond created by the policy actions of China is significant enough to keep the U.S Dollar relatively stronger than its own currency the Chinese Yuan, keeping the price of Chinese exports relatively law and competitive in the international market. This is completely legal.

It may appear to be a self-sustaining cyclical process sustaining a symbiotic relationship between the U.S and China. It may seem to be a win-win situation for both countries.   But the current U.S administration deems it otherwise. The elephant in the room for the current U.S administration is the persisting unemployment rates and dwindling wages within its economy. The current administration wants to solve these two problems through a single silver bullet. Increase exports by promoting manufacturing within the United States. As far as the current administration is concerned it cannot compete with China as an export-oriented market and a manufacturing hub when it is artificially keeping its currencies value relatively low to the U.S Dollar by its own economic policy measures. Creating a perfect environment for perpetuated trade war or currency war between the world's  largest economy and world’s second largest economy to the detriment of the current economic order.