Updated February 20, 2019
China’s Currency Policy
China’s policy of intervening in currency markets to control
RMB appreciation in June 2010. From June 2005 through
the value of its currency, the renminbi (RMB), against the
June 2015, the RMB appreciated by 35.3% on a nominal
U.S. dollar and other currencies has been of concern for
basis against the dollar.
many in Congress over the past decade or so. Some
The yuan-dollar exchange rate has experienced volatility
Members charge that China “manipulates” its currency in
over the past few years. On August 11, 2015, the Chinese
order to make its exports significantly less expensive, and
central bank announced that the daily RMB central parity
its imports more expensive, than would occur if the RMB
rate would become more “market-oriented,” However, over
were a freely traded currency. Some argue that China’s
the next three days, the RMB depreciated by 4.4% against
“undervalued currency” has been a major contributor to the
the dollar and it continued to decline against the dollar
large annual U.S. merchandise trade deficits with China
throughout the rest of 2015 and into 2016. From August
(which totaled an estimated $419 billion in 2018) and the
2015 to December 2016 the RMB fell by 8.8% against the
decline in U.S. manufacturing jobs. Bills to address foreign
dollar. From January to December 2017, the RMB rose by
currencies deemed to be undervalued have been introduced
4.6% against the dollar. However, from January 2018 to
in every Congress since 2003. China has often been the
December 2018, the RMB depreciated by 7.0%. Some
main target of such legislation, although in recent years, the
analysts link the recent RMB depreciation to the trade
currency policies of other countries have also come under
conflict that has resulted from the U.S. imposition (and
scrutiny. As a presidential candidate, Donald Trump said he
Chinese retaliation) of increased tariffs on $250 billion
would label China a “currency manipulator” on day one. On
worth of imports from China in 2018 stemming from the
February 15, 2019, the Trump Administration said that
Trump Administration’s Section 301 investigation of China
currency issues were included in negotiations with China
policies on intellectual property and innovation. They note
relating to trade disputes under U.S. Section 301 measures.
that the trade conflict has negatively impacted U.S.-China
Economic Effects of the RMB’s Value
commercial flows and China’s economy (its real GDP
growth dropped from 6.9% in 2017 to 6.6% in 2018 and is
The effects of China’s currency policy on the U.S. economy
projected to slow to 6.2% in 2019), which may be pushing
are complex. If the RMB is undervalued (as some contend),
down the RMB’s value. Others charge that China has
then it might be viewed as an indirect export subsidy which
intervened in currency markets to push down the RMB’s
artificially lowers the prices of Chinese products imported
value in order to offset the impact of U.S. tariff hikes.
into the United States. Under this view, this benefits U.S.
consumers and U.S. firms that use Chinese-made parts and
Figure 1. Average Monthly RMB-Dollar Reference
components, but could negatively affect certain U.S.
Rates: January 2015-January 2019 (Yuan per Dollar)
import-competing firms and their workers. An undervalued
RMB theoretically might also raise the price of U.S. exports
to China. However, China’s large purchases of U.S.
Treasury securities (which have been a consequence of its
currency policy) have helped the U.S. government fund its
budget deficits, which help keep U.S. interest rates low.
RMB-Dollar-Exchange Rate Trends
China has largely pegged the RMB to the dollar for several
years. Each day China’s central bank announces a central
parity rate of exchange between the RMB and the dollar
(and other currencies) and buys and sells as much currency
as needed to reach a target rate within a specific band. In

1998, the Chinese government’s central target exchange
Source: Bank of China.
rate with the dollar on average was 8.28 yuan (the base unit
Note: Chart inverted for illustrative purposes.
of the RMB) per dollar, and this rate generally remained
consistent through June 2005. Due in part to pressure from
Factors Used by Some Analysts to
its trading partners, including the United States, China
Assess the RMB’s “Valuation”
announced in July 2005 that it would appreciate the RMB
China’s large trade surpluses and accumulation of foreign
by 2.1%, peg its currency to a basket of currencies (not just
exchange reserves (FERs) have been cited by some analysts
the dollar), and allow the RMB currency to gradually
as indicators of China’s currency intervention. China’s
appreciate (described by some as a managed peg), which it
current account (CA) surplus (which includes the balance of
did, over the next three years. In July 2008, China halted
trade in goods and services, plus net income and net
RMB appreciation because of the effects of the global
transfers) as a percent of gross domestic product (GDP)
economic crisis on China’s exporters, and then resumed
rose from 1.7% in 2000 to a historic peak of 9.9% in 2007.
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China’s Currency Policy
It subsequently began to fall sharply over the next few years
Assessments of the RMB’s Value
(due in part to the impact of the 2008 global economic
Assessments of the RMB’s market valuation against the
slowdown and efforts by the government to rebalance the
dollar and other currencies differ. In July 2011, the
economy), reaching 0.7% in 2018. Economists contend that
International Monetary Fund (IMF) publicly stated that it
an important factor in ensuring that large CA surpluses
believed that the RMB was “substantially below the level
relative to GDP do not reoccur is to reduce China’s very
consistent with medium-term fundaments,” with estimates
high gross savings rate. That rate fell from 52% in 2008 to
ranging from 3% to 23%. However, in 2015 the IMF
45% in 2018, but remains high by international standards.
assessed the RMB to be “no longer undervalued,” and each
China’s FERs rose from $166 billion in December 2000 to
year from 2016-2018, it said that the RMB was “assessed as
a peak of $3.99 trillion in June 2014, but subsequently
broadly in line with fundamentals.” In February 2016, the
declined to $3.09 billion as of January 2019. Despite this
Trade Facilitation and Enforcement Act of 2015 (P.L. 114-
decline, China’s FER’s remain signifiant. In 2018, they
125) went into effect. It included several new provisions on
were equivalent to 23% of its GDP. A large amount of
monitoring and addressing foreign exchange rates and listed
Chinese of FERs has been used to buy U.S. Treasury
new enhanced factors for the Treasury Department to
securities. These holdings rose from $118 billion in
consider when determining if any country should be listed
December 2002 to a peak of $1,317 billion in November
as currency manipulators in its semi-annual report. Treasury
2013, but they declined to $1,124 billion as of December
established certain benchmarks to determine which
2018 (a $193 billion decline from their peak).
countries would be subject to enhanced analysis (and
subject to a monitoring list), including those having a
Figure 2. China’s CA as a Percent of GDP (%)
bilateral trade surplus larger than $20 billion, having a
current account surplus of more than three percent of GDP,
and engaging in persistent one-sided intervention in foreign
exchange markets resulting in net purchases equal to two
percent or more of GDP over the past year. The law also
established new remedies in regards to countries that do not
adopt appropriate policies to correct the identified
undervaluation and surpluses, prohibitions of financing by
the Overseas Private Investment Corporation (OPIC) in that
country, restrictions on U.S. government procurement;
additional efforts by U.S. officials to urge IMF action, and
taking into account such currency policies before initiating
or entering into any bilateral or regional trade agreement
negotiations. China met two out of the three criteria (large
trade surplus and current account surplus at over three
Source: International Monetary Fund.
percent of GDP) for enhanced analysis in Treasury’s April
A broader measurement of the RMB’s movement involves
2016 report. The report urged China to continue to
looking at exchange rates with China’s major trading
rebalance the economy by boosting private consumption
and said that “the RMB should continue to experience real
partners by using a trade-weighted index (i.e., a basket of
currencies) that is adjusted for inflation, often referred to as
appreciation over the medium-term.” Treasury’s October
the “real effective exchange rate” (REER). Such an index is
2016 report stated that China had met only one of the
useful because it reflects overall changes in a country’s
criteria (large trade surplus). Treasury’s October 2018
exchange rate with its major trading partners as a whole—
report stated that China’s currency interventionist policies
not just the United States. According to the Bank of
from 1988 to 2007 promoted and sustained a “significant
International Settlements, from November 2013 to
undervaluation” of the RMB, which imposed “significant
November 2015, the RMB’s REER rose by 11.9% against a
and long-lasting hardship on American workers and
basket of 61 currencies, even though, on a nominal basis,
companies.” It stated that while the RMB on a REER basis
the RMB depreciated by 4.6% against the dollar. The
had appreciated over the past decade, (reducing China’s CA
RMB’s relative peg to the dollar has often meant that as the
surplus), the RMB on a nominal basis had, over the past
U.S. dollar has appreciated in global markets, so has the
few months, depreciated against the dollar to levels last
RMB (even when the RMB has depreciated against the
seen a decade ago. Treasury said that the bilateral
dollar). In December 2015, China announced that would
imbalances were in part caused by China’s distortive
establish a new currency index rate (based on 13 foreign
economic and trade policies which limit foreign investment
currencies) to help re-orient markets away from the dollar
and imports. While Treasury expressed long-standing
by measuring the weighted change in the currency basket.
frustration with China over its failure to make its currency
From December 2015 to December 2017, the RMB’s
practices more transparent, it concluded that direct
intervention by China’s
REER fell by 6.5%, indicating a broad depreciation of the
central bank was limited. Treasury
RMB. From January to December 2018, the RMB’s REER
said China would continue to be on its monitoring list of
appreciated by 0.5% while the U.S. dollar’s REER
economies that merit close attention to their currency
appreciated by 10.8%, indicating that the strength of the
practices but did not designate it as a currency manipulator.
dollar globally (REER basis) has likely been the main cause
Wayne M. Morrison,
the RMB’s decline against the dollar on a nominal basis.
IF10139
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China’s Currency Policy


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https://crsreports.congress.gov | IF10139 · VERSION 18 · UPDATED

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