China sets rate at 2. December 1, China allows yuan convertibility on current accounts. It maintains foreign exchange controls on the capital account, particularly outflows, fearing a crisis may spark a stampede out of the yuan.
Resisting the temptation -- and some advice -- to devalue in line with its neighbors during Asian Financial Crisis, China provides some stability in the global monetary system. Barclays says the time is right to buy Chinese tech stocks, names Alibaba top pick. Chinese authorities are trying to keep the economy growing steadily as the world attempts to recover from the shock of the coronavirus pandemic last year.
However, Beijing's monetary policy has diverged from that of the U. The Chinese year government bond yields about 3. The gap in yield has created a vicious cycle of money flowing into yuan-denominated assets and strengthening the currency, which in turn then attracts more foreign capital, Xu said.
In addition to announcing an increase in the foreign exchange deposit ratio, Chinese authorities have sent other messages to the public in an attempt to prevent large moves in the yuan. The yuan may strengthen, and it may weaken, regulators said at a meeting on May 27 attended by Liu Guoqiang, a PBOC vice governor, and Wang Chunying, deputy director of the national foreign exchange regulator.
The exchange rate cannot be used as a tool, much less as a way to stimulate exports or offset the impact of rising commodity prices, meeting attendees said, according to a readout posted on the central bank's website. Separately, a former central bank director, Sheng Songcheng, told state news agency Xinhua on Sunday that the yuan is likely "overshooting" the U.
They further argue that China's undervalued currency has been a major factor in the large annual U. President Obama stated in February that China's undervalued currency puts U. Legislation to address China's currency policy has been introduced in every session of Congress since The House passed currency legislation in and the Senate did so in , although none became law.
In recent years, congressional concerns over misaligned or undervalued currencies have extended to other countries as well, leading some Members to propose that currency provisions be included in future U. In addition, China's trade surpluses have fallen sharply in recent years and its accumulation of foreign exchange reserves has slowed. These factors have led some analysts to conclude that the RMB exchange rate with the dollar may be approaching market levels, or is, at best, only modestly undervalued.
However, other analysts contend that the RMB remains significantly undervalued against the dollar and complain that the RMB has appreciated little against the dollar since the end of Thus, they argue that continued pressure must be applied until the Chinese government adopts a market-based exchange rate.
Although economists differ as to the economic effects an undervalued RMB might have on the United States many cite both positive and negative effects , most agree that greater currency flexibility by China would be one of several reforms that would help reduce global imbalances, which are believed to have been a major factor that sparked the global financial crisis and economic slowdown.
They further contend that currency reform is in China's own long-term interests because it would boost economic efficiency. China's government has pledged to continue to make its currency policy more flexible, but has maintained that appreciating the RMB too quickly could cause significant job losses especially in China's export sectors , which could disrupt the economy.
Some economists question whether RMB appreciation would produce significant net benefits for the U. They argue that prices for Chinese products would rise, which would hurt U. Treasury securities, which could cause U. It is further argued that an appreciating currency would do little to shift manufacturing done by foreign-invested firms including U. Finally, it is argued that an appreciating RMB might boost some U. Such analysts view currency reform as part of a broad set of goals that U.
These goals include inducing China to rebalance its economy by making consumer demand, rather than exports and fixed investment, the main sources of China's economic growth; eliminate industrial policies that seek to promote and protect Chinese firms especially state-owned firms ; reduce trade and investment barriers; and improve protection of U. This report provides an overview of the economic issues surrounding the current debate over China's currency policy.
It identifies the economic costs and benefits of China's currency policy for both China and the United States, and possible implications if China were to allow its currency to significantly appreciate or to float freely. It also examines legislative proposals that seek to address China's and other countries' currency policy. Prior to , China maintained a dual exchange rate system.
This consisted of an official fixed exchange rate system which was used by the government , and a relatively market-based exchange rate system that was used by importers and exporters in "swap markets," 4 although access to foreign exchange was highly restricted in order to limit imports, resulting in a large black market for foreign exchange.
The two exchange rates differed significantly. The official exchange rate with the dollar in was 5. China's dual exchange rate system was criticized by the United States because of the restrictions it and other policies placed on foreign imports. In , the Chinese government unified the two exchange rate systems at an initial rate of 8. The RMB became largely convertible on a current account trade basis, but not on a capital account basis, meaning that foreign exchange in China is not regularly obtainable for investment purposes.
The peg appears to have been largely intended to promote a relatively stable environment for foreign trade and investment in China since such a policy prevents large swings in exchange rates —a policy utilized by many developing countries in their early development stages. The Chinese central bank maintained this peg by buying or selling as many dollar-denominated assets in exchange for newly printed yuan as needed to eliminate excess demand supply for the yuan.
As a result, the exchange rate between the RMB and the dollar varied little, despite changing economic factors which could have otherwise caused the yuan to appreciate or depreciate relative to the dollar. Under a floating exchange rate system, the relative demand for the two countries' goods and assets would determine the exchange rate of the RMB to the dollar. The Chinese government modified its currency policy on July 21, It announced that the RMB's exchange rate would become "adjustable, based on market supply and demand with reference to exchange rate movements of currencies in a basket," 6 and that the exchange rate of the U.
Unlike a true floating exchange rate, the RMB would be allowed to fluctuate by up to 0. The situation at this time might be best described as a "managed float"—market forces determined the general direction of the RMB's movement, but the government retarded its rate of appreciation through market intervention.
China halted its currency appreciation policy around mid-July see Figure 1 , mainly because of declining global demand for Chinese products that resulted from the effects of the global financial crisis.
In , Chinese exports fell by The Chinese government reported that thousands of export-oriented factories were shut down and that over 20 million migrant workers lost their jobs in because of the direct effects of the global economic slowdown. Figure 1. Note: Chart inverted for illustrative purposes. A rising line indicates appreciation of the RMB to the dollar and a falling line indicates depreciation. On June 19, , China's central bank, the People's Bank of China PBC , stated that, based on current economic conditions, it had decided to "proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility.
Many observers contend the timing of the RMB announcement was intended in part to prevent China's currency policy from being a central focus of the G summit in Toronto in June As indicated in Figure 2 , the RMB's exchange rate with the dollar has gone up and down since RMB appreciation was resumed, but overall, it has appreciated. Most of the appreciation occurred in and Figure 2.
Notes: Chart inverted for illustrative purposes to show the appreciation or depreciation of the RMB against the dollar. Data are the Chinese government's official middle rate. Figure 3. This approach is relevant because if prices are rising faster in China than in the United States, then the prices of Chinese tradable goods may be rising as well even with no change in the nominal exchange rate. A broader measurement of the RMB's movement involves looking at exchange rates with China's major trading partners by using a trade-weighted index i.
China's relative peg to the dollar has meant that as the dollar has depreciated or appreciated against a number of major currencies, the RMB has depreciated or appreciated against them as well. For example, from July to May , when the RMB exchange rate to the dollar was kept constant at 6.
Between June when appreciation of the RMB to the dollar was resumed and May , China's real trade-weighted exchange rate appreciated by Figure 4. Note: Weights calculated based on China's trade with 61 economies. Inflation calculated using measurements of national consumer price indexes. Many U. Critics have further charged that the undervalued currency has been a major factor behind the burgeoning U. Other factors that have been cited as evidence of Chinese currency manipulation and misalignment have been China's massive accumulation of foreign exchange reserves and the size of its current account surpluses.
Many analysts contend that large increases in China's foreign exchange reserves reflect the significance of Chinese intervention in currency markets to hold down the value of the RMB, which, they argue, has been a major factor behind China's large annual current account surpluses. According to one economist, a country's current account balance increases between 60 and cents for each dollar spent on currency intervention. As indicated in Figure 6 , the annual rate of increase percent change in China's foreign exchange reserves went from a It dropped from a historical high of Many analysts contend the sharp drop in China's current account surpluses may have had more to do with the effects of the global economic slowdown which greatly diminished global demand for Chinese products and led to a fall in foreign direct investment in China than a change in China currency policies although other Chinese economic policies were a major factor in the decline of the current account surplus, such as government policies to boost fixed investment and consumption which were employed to maintain rapid economic growth in the face of the global economic crisis.
Figure 5. Figure 6. Figure 7. China is not alone in being accused of having an undervalued currency. Several other countries have been accused of attempting to keep the value of their currencies low through different efforts, including monetary policy.
A July study by the Peterson Institute for International Economics contends that "currency manipulation," based on "excessive" levels of foreign exchange reserves FERs , is widespread, especially in developing and newly industrialized countries. In September , Representative Mike Michaud sent a letter to Administration officials expressing "concern about Korea's ongoing intervention in its currency and its impact on U.
The undervaluation of the won already gives Korean exports a competitive advantage over U. Japanese policies to boost economic growth, including quantitative easing i. She stated: "I want to indicate for the record that unless we see changes on currency manipulation and efforts and benchmarks to Japan opening their markets, I can't imagine why would we want to proceed with a one-sided agreement as it relates to American manufacturing and the automobile industry.
Japan has used currency intervention to give Japanese auto companies one of their most significant unfair competitive advantages, adding tens of billions of dollars to their operating profits for every one-yen drop against the dollar. In a May lecture, C. Fred Bergsten from the Peterson Institute stated that the international monetary system "now faces a clear and present danger: currency wars. Virtually every major country is seeking depreciation, or at least non-appreciation, of its currency to strengthen its economy and create jobs.
A June 6, , letter to the Obama Administration from House Members on the TPP stated that it was "imperative" that the agreement address currency manipulation which has "contributed to the U. The current high rate of unemployment in the United States appears to have intensified concerns over the perceived impact of China's currency policy on the U. Many have argued that RMB appreciation would boost the level of U.
Some analysts contend that there is a direct correlation between the U. This has led some commentators to argue that China's exchange rate intervention represents a "beggar thy neighbor" policy i. The validity of claims about the RMB's effect on the U. The U. China was cited as a currency manipulator five times by Treasury from May and July over such issues as its dual exchange rate system, periods of currency devaluation, restrictions on imports, and lack of access to foreign exchange by importers.
Many Members of Congress have expressed frustration that Treasury has not cited China as a currency manipulator in recent years. A Treasury Department report stated that such a determination under the guiding statute was "inherently difficult" because of the interplay of macroeconomic and microeconomic forces throughout the world, but said that such a designation could be made if the authorities of an economy "intentionally act to set the exchange rate at levels, or ranges, such that for a protracted period the exchange rate differs significantly from the rate that would have prevailed in the absence of action by the authorities.
A Government Accountability Office GAO report on the Treasury Department's currency reports stated that in order for Treasury to reach a positive determination of currency manipulation, a country would have to have a material global current account surplus and a significant bilateral trade surplus with the United States, and would have to be manipulating its currency with the "intent" of gaining a trade advantage. Some observers contend that Treasury will not cite China as a currency manipulator because it cannot prove that China's currency policy is "intended" to give it an unfair trade advantage, since Chinese government intervention in currency markets attempts to slow or halt the appreciation of the RMB as opposed to sharply depreciating the RMB.
Other observers contend that as long as China continues to take steps to make its currency more flexible, Treasury will refrain from citing China.
A third theory states that citing China as a currency manipulator would have no practical effect especially since China and the United States are already engaged on this issue at the highest government level other than to "name and shame," a policy that could anger the Chinese government without producing any concrete results. However, some U. Numerous bills have been introduced in Congress over the past several years that have sought to induce China and other countries to reform its currency policy or to address the perceived effects of that policy on the U.
For example, one bill introduced in the th Congress by Senator Schumer S. The House approved a currency bill H. Over the past few years, some legislative proposals have sought to apply U. This would likely increase U. A major source of contention is whether such measures would be consistent with U. Some contend that the WTO allows countries under certain conditions to administer their own trade remedy laws, and thus they argue that making currency undervaluation a factor in determining countervailing or anti-dumping duties would be consistent with WTO rules.
Critics of such proposals counter that WTO rules do not specifically include currency undervaluation as a factor that can be used to implement trade remedy actions, and thus, such proposals, if enacted, might be challenged by China and possibly other WTO members as a violation of WTO rules. Another major objective of various recent currency bills is to eliminate current provisions of U.
Treasury has not identified any country for manipulating its currency since Some bills have sought to create a process whereby Treasury would identify countries with currencies that were estimated to be fundamentally misaligned based on certain criteria , regardless of intent.
Such bills list a number of actions some of which would be punitive the U. Some supporters of currency legislation aimed at China hope that the introduction of such bills will induce China to appreciate its currency more rapidly. Opponents of the bills contend that such legislation could antagonize China and induce it to slow the rate of RMB appreciation.
Another concern of opponents is that China might also retaliate against U. The bill is identical to the one he introduced in the th Congress H. Factors that would be used by the Commerce Department to determine if a country's currency is fundamentally undervalued for the purposes of U. The bill would direct the Commerce Department to estimate the "subsidy" relating to a fundamentally undervalued currency for the purpose of imposing countervailing duties, which would be defined as the difference between a currency's real effective exchange rate and its equilibrium real effective exchange rate.
If such data are not available from the IMF, Commerce would be directed to use generally accepted economic and econometric techniques and methodologies to measure the level of undervaluation. It is essentially the same bill S. The bill would provide for the identification of fundamentally misaligned currencies and require action to correct the misalignment for certain "priority" countries.
The bill would require the Treasury Department to issue a semiannual report to Congress on international monetary policy and currency exchange rates, which, in addition to several provisions under current law, 44 would include:. Treasury would be required to seek negotiations with countries designated for priority action.
Factors used to determine priority countries would include those that are 1 engaging in protracted large-scale intervention in currency markets, particularly if accompanied by monetary sterilization measures; 2 engaging in excessive and prolonged accumulation of foreign exchange reserves for balance of payment BOP purposes; 3 introducing or modifying restrictions or incentives for balance of payment purposes on capital inflows and outflows that are inconsistent with the goal of achieving full currency convertibility; and 4 pursuing any other policy or action that the Treasury Secretary views as warranting designation for priority action.
If a country that has a currency designated for priority action fails to eliminate the fundamental misalignment within 90 days, the following would occur:. If a country that has a currency designated for priority action fails to take steps to eliminate the fundamental misalignment within days after its designation by Treasury, the following would occur:.
The bill also seeks to clarify that, in the case of a subsidy relating to a fundamentally undervalued currency, the fact that the subsidy i. The bill includes waiver provisions for actions taken toward priority countries and a process for Congress to disapprove the waivers. For the purposes of measuring a benefit conferred by a misaligned currency in a regular countervailing duty case, Commerce would be directed to compare the simple average of the real exchange rates derived from the application of the IMF's equilibrium real exchange rate approach and the macroeconomic balance approach to the official daily exchange rate, relying on IMF or World Bank data, if available, or other international organizations or national governments if such data are not available.
For a countervailing duty case involving a fundamentally misaligned currency for priority action, S. For the purposes of antidumping duty cases involving a fundamentally misaligned currency for priority action, S.
Fundamental misalignment is defined as a significant and sustained undervaluation of the prevailing real effective exchange rate, adjusted for cyclical and transitory factors, from its medium-term equilibrium level. The term "fundamental misalignment" and measurements of misalignment in the bill appear to have been largely drawn from the IMF's Decision on Bilateral Surveillance over Members' Policies see text box below.
The IMF's Decision on Bilateral Surveillance over Members' Policies set new guidelines on exchange rate policies and identified certain developments that could affect global external stability, including exchange rate policies which in turn could trigger a thorough review by the IMF and possible consultations with an IMF member. Developments that could trigger a review include 1 protracted large-scale intervention in exchange markets; 2 official or quasi-official borrowing that is unsustainable or brings unduly high liquidity risks or excessive and prolonged accumulation of foreign assets for balance of payment purposes; 3 monetary and other financial policies that provide abnormal encouragement or discouragement to capital flows; 4 significant policies that restrict or provide incentives for capital flows or current transactions or payments; 5 large and prolonged current account deficits or surpluses; 6 large external sector vulnerabilities; and 7 fundamental exchange rate misalignment.
A fundamental exchange rate misalignment may trigger IMF review when 1 there is a misalignment between the prevailing real effective exchange rate and the level that would bring the underlying current account in line with the equilibrium current account; 2 the misalignment is significant; 3 the significant misalignment is expected to persist under established exchange rate policies; and 4 the significant and persistent misalignment is established beyond any reasonable doubt.
The equilibrium real effective exchange rate is defined as one that is consistent with an underlying current account adjusted for temporary factors that is estimated to be in line with economic fundamentals, such as productivity differentials, the terms of trade, permanent shifts in factor endowments, demographics, and world interest rates , over the medium term. Administration officials have welcomed greater congressional involvement on the China currency issue as long as legislative proposals do not violate U.
WTO obligations and do not complicate ongoing bilateral and multilateral negotiations with China on the issue. The Administration did not publicly indicate whether it supported or opposed the House-passed version of H.
Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. The Chinese yuan has had a currency peg since This approach keeps the value of the yuan low compared to other countries. The effect on trade is that Chinese exports are cheaper and, therefore, more attractive compared to those of other nations.
By motivating the global marketplace to buy its goods, China ensures its economic prosperity. As long as a currency peg keeps the yuan low relative to other currencies, consumers using foreign currencies can buy more of China's exports than they would if the yuan was more expensive. Specifically, if the People's Bank of China keeps the yuan weak compared to the U. Exports are a major driver of any economy because they represent money flowing into a nation. To keep the yuan artificially low and support robust export activity, the People's Bank of China engages in currency purchases.
According to the Congressional Research Service, the nation became the world's largest manufacturer in While these facts and figures are positive for China, that is not the case for everyone. As a result, U.
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