China’s Currency: A Summary of the
Economic Issues
Wayne M. Morrison
Specialist in Asian Trade and Finance
Marc Labonte
Specialist in Macroeconomic Policy
June 17, 2009
Congressional Research Service
7-5700
www.crs.gov
RS21625
CRS Report for Congress
P
repared for Members and Committees of Congress
China’s Currency: A Summary of the Economic Issues
Summary
Many Members of Congress charge that China’s policy of accumulating foreign reserves
(especially U.S. dollars) to influence the value of its currency constitutes a form of currency
manipulation intended to make its exports cheaper and imports into China more expensive than
they would be under free market conditions. They further contend that this policy has caused a
surge in the U.S. trade deficit with China in recent years and has been a major factor in the loss of
U.S. manufacturing jobs. Although China made modest reforms to its currency policy in 2005,
resulting in a gradual appreciation of its currency (about 19% through June 3, 2009), many
Members contend the reforms have not gone far enough and have warned of potential punitive
legislative action. Although an undervalued Chinese currency has likely hurt some sectors of the
U.S. economy, it has benefited others. For example, U.S. consumers have gained from the supply
of low-cost Chinese goods (which helps to control inflation), as have U.S. firms using Chinese-
made parts and materials (which helps such firms become more globally competitive). In
addition, China has used its abundant foreign exchange reserves to buy U.S. securities, including
U.S. Treasury securities, which are used to help fund the Federal budget deficit. Such purchases
help keep U.S. interest rates relatively low. For China, an undervalued valued currency has
boosted exports and attracted foreign investment, but has lead to unbalanced economic growth
and suppressed Chinese living standards.
The current global economic crisis has further complicated the currency issue for both the United
States and China. Although China is under pressure from the United States to appreciate its
currency, it is reluctant to do so because that could cause further damage to export sector and lead
to more layoffs. China has halted its gradual appreciation of its currency, the renminbi (RMB) or
yuan to the dollar in 2009, keeping it relatively constant at about 6.83 yuan per dollar. The federal
budget deficit has increased rapidly since FY2008, causing a sharp increase in the amount of
Treasury securities that must be sold. The Obama Administration has encouraged China to
continue purchasing U.S. debt. However, if China were induced to further appreciate its currency
against the dollar, it could slow its accumulation of foreign exchange reserves, thus reducing the
need to invest in dollar assets, such as Treasury securities. Legislation has been introduced in the
111th Congress to address China’s currency policy.
China’s currency policy appears to have created a policy dilemma for the Chinese government. A
strong and stable U.S. economy is in China’s national interest since the United States is China’s
largest export market. Thus, some analysts contend that China will feel compelled to keep
funding the growing U.S. debt. However, Chinese officials have expressed concern that the
growing U.S. debt will eventually spark inflation in the United States and a depreciation of the
dollar, which would negatively impact the value of China’s holdings of U.S. securities. But if
China stopped buying U.S. debt or tried to sell off a large portion of those holdings, it could also
cause the dollar to depreciate and thus reduce the value of its remaining holdings, and such a
move could further destabilize the U.S. economy. Chinese concerns over its large dollar holdings
appear to have been reflected in a paper issued by the governor of the People's Bank of China,
Zhou Xiaochuan on March 24, 2009, which called for replacing the U.S. dollar as the
international reserve currency with a new global system controlled by the International Monetary
Fund. China has also signed currency swap agreements with six of its trading partners, which
would allow those partners to settle accounts with China using the yuan rather than the dollar.
This report will be updated as events warrant.
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China’s Currency: A Summary of the Economic Issues
Contents
Introduction ................................................................................................................................ 1
China Reforms the Peg................................................................................................................ 1
U.S. Concerns Over China’s Currency Policy.............................................................................. 2
China’s Concerns Over Modifying Its Currency Policy................................................................ 2
Implications of China’s Currency Policy for its Economy............................................................ 3
Implications of China’s Currency Policy for the U.S. Economy ................................................... 3
Effect on Exporters and Import-Competitors ......................................................................... 3
Effect on U.S. Consumers and Certain Producers .................................................................. 4
Effect on U.S. Borrowers ...................................................................................................... 4
Net Effect on the U.S. Economy............................................................................................ 4
The U.S.-China Trade Deficit in the Context of the Overall U.S. Trade Deficit ...................... 5
The Global Financial Crisis and China’s Currency....................................................................... 6
Legislation ............................................................................................................................ 9
Figures
Figure 1. China’s Accumulation of Foreign Exchange Reserves: 2001-March 2009 ..................... 8
Contacts
Author Contact Information ........................................................................................................ 9
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China’s Currency: A Summary of the Economic Issues
Introduction
From 1994 until July 2005, China maintained a policy of pegging its currency, the renminbi
(RMB) or yuan, to the U.S. dollar at an exchange rate of roughly 8.28 yuan to the dollar.1 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 yuan and the dollar basically stayed the same,
despite changing economic factors which could have otherwise caused the yuan to either
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 yuan to
the dollar. Many economists contend that for the first several years of the peg, the fixed value was
likely close to the market value. But in the past few years, economic conditions have changed
such that the yuan would likely have appreciated if it had been floating. The sharp increase in
China’s foreign exchange reserves (which grew from $403 billion in 2003 to $1.95 trillion as of
March 2009) and China’s large trade surplus with the world ($297 billion in 2008) are often
viewed by critics of China’s currency policy as proof that the yuan is significantly undervalued.
China Reforms the Peg
The Chinese government modified its currency policy on July 21, 2005. It announced that the
yuan’s exchange rate would become “adjustable, based on market supply and demand with
reference to exchange rate movements of currencies in a basket” (it was later announced that the
composition of the basket includes the dollar, the yen, the euro, and a few other currencies) and
that the exchange rate of the U.S. dollar against the yuan was adjusted from 8.28 to 8.11, an
appreciation of 2.1%. Unlike a true floating exchange rate, the yuan would be allowed to fluctuate
by up to 0.3% (later changed to 0.5%) on a daily basis against the basket.
Since July 2005, China has allowed the yuan to appreciate steadily, but very slowly. It has
continued to accumulate foreign reserves at a rapid pace, which suggests that if the yuan were
allowed to freely float it would appreciate much more rapidly. The current situation might be best
described as a “managed float”—market forces are determining the general direction of the
yuan’s movement, but the government is retarding its rate of appreciation through market
intervention. From July 21, 2005 to April 13, 2009, the dollar-yuan exchange rate went from 8.11
to 6.83, an appreciation of 18.7%. The effects of the yuan’s appreciation are unclear. The price
index for U.S. imports from China in 2008, rose by 3.0% (compared to a 0.9% rise in import
prices for total U.S. imports of non-petroleum products).2 In 2008, U.S. imports from China rose
by 5.1% over the previous year, compared to import growth of 11.7% in 2007; however, U.S.
exports over this period were up 9.5% compared with an 18.1% rise in 2007. The current global
economic slowdown appears to have sharply reduced bilateral trade. During the first three months
of 2009, U.S. exports to, and imports from, China were down by 20% and 11%, respectively.
1 The official name of China’s currency is the renminbi (RMB), which is denominated in yuan units. Both RMB and
yuan are used to describe China’s currency.
2 Bureau of Labor Statistics, Import/Export Price Indexes, Press Release, January 14, 2009.
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U.S. Concerns Over China’s Currency Policy
Many U.S. policymakers and business and labor representatives have charged that China’s
currency is significantly undervalued vis-à-vis the U.S. dollar (even after the recent revaluation),
making Chinese exports to the United States cheaper, and U.S. exports to China more expensive,
than they would be if exchange rates were determined by market forces. They further argue that
the undervalued currency has contributed to the burgeoning U.S. trade deficit with China (which
was $266 billion in 2008) and has hurt U.S. production and employment in several U.S.
manufacturing sectors that are forced to compete domestically and internationally against
“artificially” low-cost goods from China. Furthermore, some analysts contend that China’s
currency policy induces other East Asian countries to intervene in currency markets in order to
keep their currencies weak against the dollar in order to compete with Chinese goods. Critics
contend that, while it may have been appropriate for China during the early stages of its economic
development to maintain a pegged currency, it should let the yuan freely float today, given the
size of the Chinese economy and the impact its policies have on the world economy.
China’s Concerns Over Modifying Its Currency
Policy
Chinese officials argue that its currency policy is not meant to favor exports over imports, but
instead to foster economic stability through currency stability, as many other countries do. They
have expressed concern that floating its currency could spark an economic crisis in China and
would especially be damaging to its export industries at a time when painful economic reforms
(such as closing down inefficient state-owned enterprises) are being implemented. They further
contend that the Chinese banking system is too underdeveloped and burdened with heavy debt to
be able to deal effectively with possible speculative pressures that could occur with a fully
convertible currency. The global financial crisis has had a significant impact on China’s trade and
foreign direct investment (FDI) flows. China’s trade (exports and imports) and inflows of FDI
declined each month from November 2008 to April 2009 on a year-on-year basis. In February
2009, China’s exports and imports were down 25.7% and 24.1%, respectively (year-on-year
basis), the biggest monthly decline recorded since reforms began in 2009.3 Thousands of export-
oriented factories have reportedly been shut down. The Chinese government has estimated that 20
million migrant workers lost their jobs because of the global financial crisis in 2008. Chinese
officials view economic stability as critical to sustaining political stability; they fear an
appreciated currency could cause even more employment disruptions and thus could cause
worker unrest. However, Chinese officials have indicated that their long-term goal is to adopt a
more flexible exchange rate system and to seek more balanced economic growth through
increased domestic consumption and the development of rural areas, but they claim they want to
proceed at a gradual pace.
3 See CRS Report RS22984, China and the Global Financial Crisis: Implications for the United States, by Wayne M.
Morrison
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Implications of China’s Currency Policy for its
Economy
If the yuan is undervalued vis-à-vis the dollar (estimates rage from 15% to 40% or higher), then
Chinese exports to the United States are likely cheaper than they would be if the currency were
freely traded, providing a boost to China’s export industries (and, to some degree, an indirect
subsidy). Eliminating exchange rate risk through a managed peg also increases the attractiveness
of China as a destination for foreign investment in export-oriented production facilities. However,
an undervalued currency makes imports more expensive, hurting Chinese consumers and Chinese
firms that import parts, machinery, and raw materials. Such a policy, in effect, benefits Chinese
exporting firms (many of which are owned by foreign multinational corporations) at the expense
of non-exporting Chinese firms, especially those that rely on imported goods. This may impede
the most efficient allocation of resources in the Chinese economy. Another major problem is that
the Chinese government must expand the money supply in order to keep purchasing dollars,
which has promoted the banks to adopt easy credit policies.4 In addition, in the past, “hot money”
has poured into China from investors speculating that China will continue to appreciate the yuan.
At some point, these factors could help fuel inflation, overinvestment in various sectors, and
expansion of nonperforming loans by the banks—each of which could threaten future economic
growth.
Implications of China’s Currency Policy for the U.S.
Economy
Effect on Exporters and Import-Competitors
When exchange rate policy causes the yuan to be less expensive than it would be if it were
determined by supply and demand, it causes Chinese exports to be relatively inexpensive and
U.S. exports to China to be relatively expensive. As a result, U.S. exports and the production of
U.S. goods and services that compete with Chinese imports fall, in the short run.5 Many of the
affected firms are in the manufacturing sector.6 This causes the trade deficit to rise and reduces
aggregate demand in the short run, all else equal.7 Some analysts contend that China’s currency
4 Prior to the current global economic slowdown, easy monetary policies were contributing to inflationary pressures in
China.
5 Many such firms contend that China’s currency policy constitutes one of several unfair trade advantages enjoyed by
Chinese firms, including low wages, lack of enforcement of safety and environmental standards, selling below cost
(dumping) and direct assistance from the Chinese government.
6 U.S. production has moved away from manufacturing and toward the service sector over the past several years. U.S.
employment in manufacturing as a share of total nonagricultural employment fell from 31.8% in 1960, to 22.4% in
1980, to 10.2% in 2007. This trend is much larger than the Chinese currency issue and is caused by numerous other
factors.
7 Putting exchange rate issues aside, most economists maintain that trade is a win-win situation for the economy as a
whole, but produces losers within the economy. Economists generally argue that free trade should be pursued because
the gains from trade are large enough that the losers from trade can be compensated by the winners, and the winners
will still be better off.
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policy constitutes a de facto or indirect export subsidy and should be subject to U.S.
countervailing laws.
Effect on U.S. Consumers and Certain Producers
A society’s economic well-being is usually measured not by how much it can produce, but how
much it can consume. An undervalued yuan that lowers the price of imports from China allows
the United States to increase its consumption through an improvement in the terms-of-trade.
Since changes in aggregate spending are only temporary, from a long-term perspective the lasting
effect of an undervalued yuan is to increase the purchasing power of U.S. consumers. Imports
from China are not limited to consumption goods. U.S. producers also import capital equipment
and inputs to final products from China. An undervalued yuan lowers the price of these U.S.
products, increasing their output.
Effect on U.S. Borrowers
An undervalued yuan also has an effect on U.S. borrowers. When the U.S. runs a current account
deficit with China, an equivalent amount of capital flows from China to the United States, as can
be seen in the U.S. balance of payments accounts. This occurs because the Chinese central bank
or private Chinese citizens are investing in U.S. assets, which allows more U.S. capital
investment in plant and equipment to take place than would otherwise occur. Capital investment
increases because the greater demand for U.S. assets puts downward pressure on U.S. interest
rates, and firms are now willing to make investments that were previously unprofitable. This
increases aggregate spending in the short run, all else equal, and also increases the size of the
economy in the long run by increasing the capital stock.
Private firms are not the only beneficiaries of the lower interest rates caused by the capital inflow
(trade deficit) from China. Interest-sensitive household spending, on goods such as consumer
durables and housing, is also higher than it would be if capital from China did not flow into the
United States. In addition, a large proportion of the U.S. assets bought by the Chinese,
particularly by the central bank, are U.S. Treasury securities, which fund U.S. federal budget
deficits. According to the U.S. Treasury Department, China held $$764 billion in U.S. Treasury
securities as of April 2009, making it the largest foreign holder of such securities. If the U.S. trade
deficit with China were eliminated, Chinese capital would no longer flow into this country on net,
and the government would have to find other buyers of U.S. Treasuries. This could increase the
government’s interest payments.
Net Effect on the U.S. Economy
In the medium run, an undervalued yuan neither increases nor decreases aggregate demand in the
United States. Rather, it leads to a compositional shift in U.S. production, away from U.S.
exporters and import-competing firms toward the firms that benefit from Chinese capital flows.
Thus, it is expected to have no medium or long run effect on aggregate U.S. employment or
unemployment. As evidence, one can consider that the U.S. had a historically large and growing
trade deficit throughout the 1990s at a time when unemployment reached a three-decade low.
However, the gains and losses in employment and production caused by the trade deficit will not
be dispersed evenly across regions and sectors of the economy: on balance, some areas will gain
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while others will lose. And by shifting the composition of U.S. output to a higher capital base, the
size of the economy would be larger in the long run as a result of the capital inflow/trade deficit.
Although the compositional shift in output has no negative effect on aggregate U.S. output and
employment in the long run, there may be adverse short-run consequences. If output in the trade
sector falls more quickly than the output of U.S. recipients of Chinese capital rises, aggregate
spending and employment could temporarily fall. This is more likely to be a concern if the
economy is already sluggish than if it is at full employment. Otherwise, it is likely that
government macroeconomic policy adjustment and market forces can quickly compensate for any
decline of output in the trade sector by expanding other elements of aggregate demand. The
deficit with China has not prevented the U.S. economy from registering high rates of growth.
The U.S.-China Trade Deficit in the Context of the Overall U.S.
Trade Deficit
While China is a large trading partner, it accounted for only 16.1% of U.S. merchandise imports
in 2008 and 33% of the sum of all U.S. bilateral trade deficits.8 Over a span of several years, a
country with a floating exchange rate can consistently run an overall trade deficit for only one
reason: a domestic imbalance between saving and investment. Over the past two decades, U.S.
saving as a share of gross domestic product (GDP) has been in gradual decline. On the one hand,
the U.S. has high rates of productivity growth and strong economic fundamentals that are
conducive to high rates of capital investment. On the other hand, it has a chronically low
household saving rate, and recently a negative government saving rate as a result of the budget
deficit. As long as Americans save little, foreigners will use their saving to finance profitable
investment opportunities in the United States; the trade deficit is the result.9 The returns to
foreign-owned capital will flow to foreigners instead of Americans, but the returns to U.S. labor
utilizing foreign-owned capital will flow to U.S. labor.
More than half of China’s exports to the world are produced by foreign-invested firms in China,
many of which have shifted production to China in order to gain access to low-cost labor. (The
returns to capital of U.S. owned firms in China flow to Americans.) Such firms import raw
materials and components (much of which come from East Asia) for assembly in China. As a
result, China tends to run trade deficits with East Asian countries (such as Taiwan, South Korea,
and Japan) and trade surpluses with countries with high consumer demand, such as the United
States. These factors imply that much of the increase in U.S. imports (and hence, the rising trade
deficit with China) is largely the result of China becoming a production platform for many
foreign companies, rather than unfair Chinese trade policies.
8 This figure is somewhat misleading because the United States run trade deficits with some countries and surpluses
with others. A different approach would be to sum up the balances of those countries in which the United States ran a
trade deficit with. In 2008, the United States ran trade deficits with 91 countries in 2008, totaling $951.9 billion; the
U.S. trade deficit with China was equal to 27.9% of this amount
9 Most economists believe that the United States runs a trade deficit because it fails to save enough to meet its
investment needs and must obtain savings from other countries with high savings rates. China has one of the world’s
largest savings rate.
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The Global Financial Crisis and China’s Currency
The impact of the global financial crisis has raised concerns in the United States over the future
course of China’s currency policy. Prior to the crisis, there were high expectations among many
analysts that China would continue to appreciate its currency and implement financial reforms to
pave the way towards eventually adopting a floating currency. However, China’s economy has
slowed significantly in recent months, due largely to a fall in global demand for Chinese
products. The Chinese government appears to have halted the yuan’s appreciation over the past
few months. The rate of exchange between the yuan and the dollar on January 1, 2009 and June 3,
2009 stayed relatively constant 6.83 yuan per dollar, indicating that the Chinese government has,
at least temporarily, halted its policy of allowing the yuan to gradually appreciate.
It is not known the extent to which the government is intervening to maintain the current
exchange rate, and whether the government is buying dollars to limit appreciation, or selling
dollars, to limit further devaluation. Either way, a stable exchange rate with the dollar benefits
China in a number of ways:
• Exports and Foreign Direct Investment. Keeping the exchange rate with the
dollar stable may help to stem further declines in exports and FDI and thus halt
further factory closings and layoffs in such sectors.
• China as a “Responsible Stakeholder.” Over the past several years, Chinese
leaders have sought to portray China as a responsible stakeholder (and
increasingly a leader) on global economic issues. Chinese officials contend that
during the 1997-98 Asian crisis, when several other nations sharply devalued
their currencies, China “held the line” by not devaluing its currency, which might
have prompted a new round of destructive devaluations across Asia. This policy
was highly praised at the time by U.S. officials, including President Clinton.
Although devaluing the RMB against the dollar could help China’s trade sector, it
could cause other economies in the Asia to devalue their currencies, which could
further undermine economic stability in the region and negatively affect China’s
relations with its neighbors.
• Avoiding Trade Tensions. Chinese officials appear to be deeply concerned over
“growing protectionism” in the United States. They are keenly aware that
numerous congressional proposals have been introduced in the past which would
take tough action against China’s currency policy.
• Protecting the Value of China’s Investments. China is believed to hold more
than $1 trillion in U.S. securities. A major concern for Chinese officials as it has
gradually appreciated the currency (until recently) has been the decline in value
of these assets brought about by that appreciation. Thus, halting the appreciation
of the yuan halts further losses from U.S.-held assets.
There may be a number of reasons why holding the exchange rate constant may not beneficial to
China:
• Continued Reliance on Exports and Fixed Investment. Numerous economists
contend that China needs to rebalance its economy by lessening its dependence
on exports and fixed investment, which have been largely driven by China’s
currency policy, and do more to promote domestic consumption, improve the
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social safety net, and boost living standards among the poor. Such analysts
contend that an appreciation of the yuan to “market levels” is a key factor to
attaining a more balanced economy (by eliminating economic distortions caused
by an undervalued currency).
• Holding the Line May Not be Enough to Stop Congressional Action.
Although China allowed its currency to appreciate somewhat after 2005, it did
not stem the tide of congressional criticism over its exchange rate policy. China
has constantly argued that it has increasingly making its exchange rate system
more flexible. Halting appreciation of the yuan may be viewed by some
Members as an abandonment of China’s commitments to reform the currency.
Keeping the exchange rate with the dollar roughly the same could lessen the
chance that such bills would be acted upon (see “Legislation,” below).
• The View That China Could Do More to Promote Global Recovery. Chinese
officials have stated that their biggest contribution to a global economic recovery
is to maintain its rapid economic growth. To that end, the government is in the
process of implementing a $586 billion stimulus plan (announced in November
2008), a large share of which will go into infrastructure projects. It is not clear to
what extent the stimulus package will promote imports. Some analysts have
contended that if China combined domestic spending with more market opening
measures, including adopting a more flexible exchange rate policy, it would
greatly boost China’s imports. This would help stimulate economic recoveries in
other countries, and also improve living standards in China.10
The Obama Administration has encouraged China to continue purchasing U.S. debt. Secretary of
State Hillary Clinton was reportedly quoted as saying,
Well, I certainly do think that the Chinese government and the central bank here in China is
making a very smart decision by continuing to invest in treasury bonds for two reasons....
(Second,) the Chinese know that, in order to start exporting again to its biggest market,
namely, the United States, the United States has to take some very drastic measures with this
stimulus package, which means we have to incur more debt. It would not be in China's
interest if we were unable to get our economy moving again. So, by continuing to support
American Treasury instruments, the Chinese are recognizing our interconnection.11
China’s currency policy appears to have created a policy dilemma for the Chinese government. A
strong and stable U.S. economy is in China’s national interest since the United States is China’s
largest export market. Thus, some analysts contend that China will feel compelled to keep
funding the growing U.S. debt. However, Chinese officials have expressed concern that the
growing U.S. debt will eventually spark inflation in the United States and a depreciation of the
dollar, which would negatively impact the value of China’s holdings of U.S. securities. But if
China stopped buying U.S. debt or tried to sell off a large portion of those holdings, it could also
cause the dollar to depreciate and thus reduce the value of its remaining holdings, and such a
move could further destabilize the U.S. economy. Chinese concerns over its large dollar holdings
appear to have been reflected in a paper issued by the governor of the People's Bank of China,
10 Many Chinese have become increasing critical of China’s currency policy because the large levels of foreign
exchange reserves generated by that policy are invested in overseas assets with relatively low (and sometimes negative)
returns.
11 Secretary Clinton, Interview With Yang Lan of Dragon TV, Beijing, China, February 22, 2009.
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Zhou Xiaochuan on March 24, 2009, which called for replacing the U.S. dollar as the
international reserve currency with a new global system controlled by the International Monetary
Fund.12 China has also signed currency swap agreements totaling 650 billion yuan (or about $95
billion) with Hong Kong, Argentina, Indonesia, South Korea, Malaysia, and Belarus, which
would allow those partners to settle accounts with China using the yuan rather than the dollar in
order to facilitate bilateral trade and investment.13 It is not clear if such a move signifies a gradual
effort on the part of the Chinese government to eventually make the yuan an internationally
traded currency.
Chinese data indicate that its accumulation of foreign exchange reserves has slowed sharply in
2009. From the end of December 2008 to the end of March 2009, those reserves grew by only
$7.7 billion, reflecting sharp decreases in China’s net exports, foreign direct investment, and hot
money inflows (see Figure 1). If this trends continues, it will lessen China’s need to intervene to
keep the value of yuan against the dollar within its targeted range. However, it could also slow
China’s purchases of U.S. securities.14 In fact, China’s holdings of U.S. Treasury Securities fell by
$4.4 billion in April 2009 over March 2009 holdings.
Figure 1. China’s Accumulation of Foreign Exchange Reserves: 2001-March 2009
$billions
($ in billions)
2,000
1,946
1,954
1,528
1,500
1,066
1,000
819
610
500
286
304
212
0
2002
2004
2006
2008
2001
2003
2005
2007
Mar 2009
Source: Chinese State Administration of Foreign Exchange.
Note: End-year or end-month data.
12 For copy of the proposal, see the Chinese People’s Bank of China website at
http://www.pbc.gov.cn/english/detail.asp?col=6500&id=178.
13 Under a currency swap arrangement, two parties exchange currencies for a certain length of time and agree to reverse
the transaction at a later date. See, the Federal Reserve Bank of New York, the Basics of Foreign Trade and Exchange,
available at http://www.ny.frb.org/education/fx/foreign.html.
14 See, CRS Report RL34314, China’s Holdings of U.S. Securities: Implications for the U.S. Economy, by Wayne M.
Morrison and Marc Labonte.
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Legislation
Numerous bills have been introduced over the past few years that seek to induce China to reform
its currency. Bills in the 111th Congress include the following.
• H.R. 2378 (Tim Ryan) and S. 1027 (Stabenow) would make fundamental
exchange-rate misalignment by any foreign nation actionable under U.S.
countervailing laws (dealing with government subsidies and antidumping
(dealing with products sold at fair market value).
• S. 1254 (Schumer) would require the Treasury Department to identify currencies
that are fundamentally misaligned and to designate currencies for “priority
action” under certain circumstances. Such action would include factoring
currency undervaluation in U.S. anti-dumping cases, banning federal
procurement of products or services from the designated country, and filing a
case against that country in the WTO.
Author Contact Information
Wayne M. Morrison
Marc Labonte
Specialist in Asian Trade and Finance
Specialist in Macroeconomic Policy
wmorrison@crs.loc.gov, 7-7767
mlabonte@crs.loc.gov, 7-0640
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