May 18, 2015
China’s Currency Policy
China’s policy of intervening in currency markets to limit
and then resumed RMB appreciation in June 2010. From
or halt the appreciation of its currency, the renminbi
June 2005 through December 2014, the RMB appreciated
(RMB), against the U.S. dollar and other currencies has
by 34% on a nominal basis against the dollar, although the
been an issue of concern for many in Congress over the past
rate of appreciation has slowed in recent years. In 2014, the
decade or so. Some Members charge that China
RMB depreciated by 0.2% against the dollar over 2013
“manipulates” its currency in order to make its exports
levels. During the first four months of 2015, the exchange
significantly less expensive, and its imports more
rate averaged 6.23 yuan per dollar. Some analysts speculate
expensive, than would occur if the RMB were a freely
that the Chinese government has sought to slow, and
traded currency. Some argue that the RMB is significantly
sometimes reverse, the pace of RMB appreciation due to
undervalued against the dollar and that this has been a
concerns over a slowing Chinese economy (and its impact
major contributor to the large annual U.S. merchandise
on exporters) and to deter illegal capital inflows from
trade deficits with China (which was $343 billion in 2014)
outside speculators who expect that the RMB will continue
and the decline in U.S. manufacturing jobs. Legislation to
to rise and hope to profit from it. The Chinese government
address foreign currencies deemed to be undervalued has
appears to be concerned that such inflows could lead to
been introduced in every Congress since 2003. China has
volatile and unpredictable movements in the RMB’s value.
often been the main target of such legislation, although in
Figure 1. Average Annual RMB-Dollar Exchange
recent years, the currency policies of other countries have
Rates: 2004-2014 (Yuan per Dollar)
also come under scrutiny. In the 114th Congress, H.R. 820,
S.433, and S. 1267 would seek to treat certain undervalued
currencies as an actionable subsidy under U.S.
countervailing laws.
5.5
Economic Considerations
6.15
6.16
6.0
6.31
6.46
The effects of China’s currency policy on the U.S. economy
6.5
6.83
6.77
6.95
are complex. If the RMB is undervalued (as some contend),
7.0
then it might be viewed as an indirect export subsidy which
7.61
artificially lowers the prices of Chinese products imported
7.5
7.97
into the United States. Under this view, this benefits U.S.
8.0
8.28
8.19
consumers and U.S. firms that use Chinese-made parts and
components, but could negatively affect certain U.S.
8.5
import-competing firms and their workers. An undervalued
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

RMB might also have a more limiting effect on the level of
Source: Global Insight.
U.S. exports to China than might occur under a floating
Notes: Chart inverted for il ustrative purposes.
exchange rate system. However, China’s large purchases of
A broader measurement of the RMB's movement involves
U.S. Treasury securities (which have been a consequence of
looking at exchange rates with China's major trading
its currency policy) have helped the U.S. government fund
partners by using a trade-weighted index (i.e., a basket of
its budget deficits, which help keep U.S. interest rates low.
currencies) that is adjusted for inflation, often referred to as
The RMB’s Exchange Rate
the "effective exchange rate" (EER). Such an index is
useful because it reflects overall changes in a country's
China has pegged the RMB to the dollar for several years.
exchange rate with its major trading partners as a whole—
Each day China’s central bank announces a central rate of
not just the United States. According to the Bank of
exchange between the RMB and the dollar and buys and
International Settlements (BIS), from July 2005 to April
sells as much currency as needed to reach a target rate
2015, the RMB’s EER rose by 43% against a basket of 61
within a specific band. In 1998, the Chinese government’s
trading economies; and from December 2013 to April 2015,
central target exchange rate with the dollar on average was
it increased by 10%. China's relative peg to the dollar has
8.28 yuan (the base unit of the RMB) per dollar, and this
meant that as the dollar has depreciated or appreciated
rate was generally maintained consistently through June
against a number of major currencies, the RMB has
2005. Due in part to pressure from its trading partners,
depreciated or appreciated against them as well.
including the United States, China announced in July 2005
that it would appreciate the RMB by 2.1%, peg its currency
Factors Used by Some Analysts to
to a basket of currencies (not just the dollar), and allow the
Assess the RMB’s Valuation
RMB currency to gradually appreciate (described by some
as a managed peg), which it did over the next three years. In
China’s large trade surpluses and accumulation of foreign
July 2008, China halted RMB appreciation because of the
exchange reserves (FERs) have been cited by some analysts
effects of the global economic crisis on China’s exporters,
as indicators of China’s currency intervention. China’s
current account (CA) surplus (which includes the balance of
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China’s Currency Policy
trade in goods and services, plus net income and net
July 2014, China has essentially refrained from foreign
transfers) as a percent of gross domestic product (GDP)
exchange purchases.
rose from 1.7% in 2000 to a historic peak of 10.1% in 2007.
U.S. Engagement with China
It subsequently fell to 2.0% in 2014. The IMF projects that
level may rise to 3.0% by 2020.
U.S. officials have sought to engage China over its currency
China’s FERs rose from $166 billion in December 2000 to
for the past several years. In April 2005 then-U.S. Treasury
a peak of $3.99 trillion in July 2014. Critics note that
Secretary John Snow asserted at a G-7 meeting that China
China’s FERs are very large relative to the size of the
was “ready now to adopt a more flexible exchange rate.”
economy (in 2014, they were equal to 37.1% of GDP) and
Currency issues were a main topic of the U.S.-China
that these levels are well beyond the amount of FERs that
Strategic Economic Dialogue (SED), a framework that was
might be needed as insurance against an economic crisis,
established in 2006 under the Bush Administration to
leaving little economic rationale for the large holdings.
enable senior Chinese and U.S. officials to address long-
From December 2004 to December 2013, China’s FERs
term strategic and economic challenges. Such discussions
grew at an average annual rate of $342 billion. However,
continued under its successor framework, the U.S.-China
from July 2014 to March 2015, China’s FERs declined by
Strategic and Economic Dialogue (S&ED). For example,
$262 billion (to $3.73 trillion). A significant amount of
during the July 2014 S&ED session, China pledged that it
Chinese of FERs have been used to purchase U.S. Treasury
would continue moving to a market-determined exchange
securities. China’s holdings rose from $118 billion in 2002
rate, increase exchange rate flexibility, reduce foreign
to $1.26 trillion as of March 2015. China is currently the
exchange intervention (as conditions permit), and enhance
largest foreign holder of U.S. Treasury securities.
the transparency of its foreign exchange holdings, and take
steps to boost private consumption. China has also taken a
Figure 2. China’s Current Account Balance as a
number of steps to boost the internationalization of the
Percent of GDP: 2000 to 2014 (%)
RMB. According to Swift, a transactions company, 50
countries are now using the RMB for more than 10% of
their payments value with China and Hong Kong.
12.0
Recent Assessments of the RMB’s Value
10.1
10.0
9.2
There is little consensus among economists on how close
8.3
the RMB’s exchange rate may (or may not) be to its
8.0
“market value,” or the extent China currently may be
5.8
6.0
intervening in currency markets to affect the RMB’s
4.8 4.0
exchange rate (since China does not publicize this
3.5
4.0
2.6
information). To illustrate: in February 2014, Lombard
2.4 2.6
1.7
1.9
1.9 2.0
2.0
1.3
Street Research (an economic forecasting firm) estimated
that the RMB has been “overvalued since 2012.” In May
0.0
2014, Martin Kessler and Arvind Subramanian with the
2000
2002
2004
2006
2008
2010
2012
2014
Peterson Institute for International Economics (PIIE)
Source: IMF, World Economic Outlook, April 2015.
estimated that the RMB in 2014 was “fairly valued.” In July
2014, the International Monetary Fund (IMF) assessed the
Figure 3. China’s Foreign Exchange Reserves and
RMB to be “moderately undervalued” with a range of 5-
Holdings of U.S. Treasury Securities: 2002-March
10%. In April 2015, the U.S. Department of the Treasury
2015 ($Billions)
said that the RMB remained “significantly undervalued.”
4,500
Issues for Congress
4,000
3,500
The effects of the recent global economic crisis have
3,000
refocused attention by many economists on the need to
2,500
continue efforts to reduce global imbalances in savings,
2,000
investment, and trade in order to help avoid future crises.
1,500
As part of that goal, such economists have encouraged
1,000
China to lessen its dependence on exports and fixed
500
investment as the main drivers of its economic growth,
0
while boosting the level of domestic consumer demand.
The adoption of a market-determined exchange rate
mechanism could be an important component to achieving
FERs
U.S. Treasury Securities
this goal. It could help boost Chinese imports (including
Source: Chinese State Administration of Foreign Exchange and U.S.
from the United States), increase competition in China,
Department of the Treasury.
reduce distortions in the economy, and accelerate the pace
Some analysts argue that the decline of China’s CA surplus
of financial reforms.
and FERs may indicate the RMB is no longer as
undervalued as it once was and that the level of Chinese
Wayne M. Morrison, wmorrison@crs.loc.gov, 7-7767
currency intervention has diminished. On February 19,

2015, Reuters quoted U.S. Treasury Under Secretary for
IF10139
International Affairs, Nathan Sheets, as stating that, since
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