Chinas-Currency：An-Analysis-of-the-Economic-Issues

CRSReportforCongressPreparedforMembersandCommitteesofCongressChina’sCurrency:AnAnalysisoftheEconomicIssuesWayneM.MorrisonSpecialistinAsianTradeandFinanceMarcLabonteSpecialistinMacroeconomicPolicyOctober1,2010CongressionalResearchService7-5700’sCurrency:AnAnalysisoftheEconomicIssuesCongressionalResearchServiceSummaryOverthepastseveralyears,theChinesegovernmenthasmaintainedapolicyofinterveningincurrencymarketstolimitorhalttheappreciationofitscurrency,therenminbi(RMB)againstothermajorcurrencies,especiallytheU.S.dollar.ThispolicyappearstobelargelyintendedtokeepChina’sexportindustriescompetitiveinternationallyandtoattractforeigndirectinvestment(FDI),whichhavebeenmajorfactorsbehindChina’srapideconomicgrowth.CriticschargethatthispolicyconstitutesaformofcurrencymanipulationthatisintendedtomakeChineseexportscheaper,andimportsintoChinamoreexpensive,thantheywouldbeunderafloatingexchangesystem.SomeclaimthatChina’scurrencypolicyisamajorcauseofthelargeU.S.tradeimbalancewithChinaandthelossofnumerousU.S.jobs.ManyMembersofCongresshaveurgedtheObamaAdministrationtodesignateChinaasa“currencymanipulator”inordertopressureittolettheRMBappreciate,andseveralbillshavebeenintroduced(includingH.R.2378,S.1254,S.1027,andS.3134)whichseektoaddressChina’scurrencypolicy.OnSeptember29,2010,theHouseapprovedanamendmentinthenatureofasubstitutetoH.R.2378(byavoteof348to79).ThebillwouldattempttoapplyU.S.countervailinglawstocertainfundamentallyundervaluedcurrencies.FromJuly2005toJuly2008,theRMBwasallowedtograduallyappreciateagainstthedollar,risingbyabout21%overthisperiod.However,oncetheeffectsoftheglobaleconomiccrisisbegantobecomeapparent,ChinahaltedappreciationoftheRMBtothedollarinanefforttolimitjoblossesinindustriesdependentontrade.FromJuly2008tolateJune2010,ChinakepttheexchangerateoftheRMBatroughly6.83yuan(thebaseunitoftheRMB)tothedollar.OnJune19,2010,theChinesecentralbankstatedthat,basedoncurrenteconomicconditions,ithaddecidedto“proceedfurtherwithreformoftheRMBexchangerateregimeandtoenhancetheRMBexchangerateflexibility.”EventsfollowingtheannouncementdemonstratethataflexibleRMBexchangeratecouldmovebothupanddownovershortperiodsoftime.BySeptember23,theRMBhadappreciatedbyabout1.9%to6.7yuan.ManyU.S.officialshavecriticizedtheslowpaceofRMB’sappreciation.ManyeconomistshavearguedthatRMBappreciationisanimportantfactorinhelpingtorebalancetheworldeconomy.TheyhavealsourgedChinatoimplementpoliciestomakeconsumerdemand,ratherthanexportsandfixedinvestment,themainsourcesofeconomicgrowth.SomeseeRMBappreciationasawayofboostingChina’simports,whichcouldcontributetoafasterglobaleconomicrecovery.WhileChineseofficialsacknowledgetheneedtorebalancetheeconomy,theyhavestronglyresistedinternationalpressuretoappreciateandreformthecurrency,callingit“protectionism.”SomeattributethispolicytoconcernsbytheChinesegovernmentthatimplementingpolicychangestoorapidlycouldleadtosocialinstability.WhiletheObamaAdministrationhaspushedChinatoappreciateitscurrency,ithasalsoencouragedittocontinuepurchasingU.S.Treasurysecurities.ChinaisthelargestforeignholderofU.S.Treasurysecurities,whichtotaled$847billionasofJuly2010.Someanalystscontendthat,althoughanappreciationofChina’scurrencycouldhelpboostU.S.exportstoChina,itcouldalsolessenChina’sneedtobuyU.S.Treasurysecurities,whichcouldpushupU.S.interestrates.ItcouldresultinhigherpricesofChinese-madegoodsforU.S.consumers,aswellasforChinese-madeinputsthatU.S.firmsuseintheirproduction.Manyeconomistscontendthat,evenifChinasignificantlyappreciateditscurrency,theUnitedStateswouldstillneedtoincreaseitssavingsandreducedomesticdemand(particularlythebudgetdeficit),andChinawouldhavetoloweritssavingsandincreaseconsumption,inordertoreducetradeimbalancesinthelongrun.China’sCurrency:AnAnalysisoftheEconomicIssuesCongressionalResearchServiceContentsIntroduction................................................................................................................................1HistoricalBackgroundonChina’sCurrency................................................................................22005:ChinaReformsthePeg......................................................................................................2RecentRMBDevelopments..................................................................................................4OverviewoftheDebateOverChina’sCurrencyPolicy:U.S.andChinesePerspectives.......................................................................................................................5ConcernsintheUnitedStates:TradeDeficitsandJobs....................................................5U.S.LegislativeProposals...............................................................................................9China’sPerspectiveandConcerns:EconomicGrowthandStability.....................................10AnEconomicAnalysisoftheChinaCurrencyIssue..................................................................12IstheRMBUndervalued,andifso,byHowMuch?............................................................12W