China’s Currency Policy
Updated May 24, 2019
China’s Currency Policy
China’s policy of intervening in currency markets to control
June 2015, the RMB appreciated by 35.3% on a nominal
the value of its currency, the renminbi (RMB), against the
basis against the dollar.
U.S. dollar and other currencies has been of concern for
The yuan-dollar exchange rate has experienced volatility
many in Congress over the past decade or so. Some
over the past few years. On August 11, 2015, the Chinese
Members charge that China “manipulates” its currency in
central bank announced that the daily RMB central parity
order to make its exports significantly less expensive, and
rate would become more “market-oriented,” However, over
its imports more expensive, than would occur if the RMB
the next three days, the RMB depreciated by 4.4% against
were a freely traded currency. Some argue that China’s
the dollar and it continued to decline against the dollar
“undervalued currency” has been a major contributor to the
throughout the rest of 2015 and into 2016. From August
large annual U.S. merchandise trade deficits with China
2015 to December 2016, the RMB fell by 8.8% against the
(which totaled $419 billion in 2018) and the decline in U.S.
dollar. From January to December 2017, the RMB rose by
manufacturing jobs. Legislation aimed at addressing
4.6% against the dollar.
“undervalued” or “misaligned” currencies has been
introduced in several congressional sessions. On May 23,
Since 2018, the RMB’s value against the dollar has
2019, the U.S. Department of Commerce published a notice
generally trended downward. Many economists contend
in the Federal Register proposing to make an undervalued
that the RMB’s recent decline has largely been caused by
currency (as determined by the U.S. Department of
China’s slowing economy and by the uncertainties resulting
Treasury) an actionable subsidy under U.S. countervailing
from the ongoing U.S.-China Section 301 trade dispute,
duty proceedings.
which has led to three rounds of tariff hikes on a significant
Economic Effects of the RMB’s Value
level of bilateral trade. From March 2018 (when the Trump
Administration announced it would pursue punitive
The effects of China’s currency policy on the U.S. economy
measures under Section 301 against China) to May 2019,
are complex. If the RMB is undervalued (as some contend),
the RMB depreciated by 8.2%. On May 10, 2019, the
then it might be viewed as an indirect export subsidy which
Trump Administration increased tariffs on the third tranche
artificially lowers the prices of Chinese products imported
of Section 301 tariff hikes (affecting $200 billion worth of
into the United States. Under this view, this benefits U.S.
imports to China) from 10% to 25% and proposed to raise
consumers and U.S. firms that use Chinese-made parts and
tariffs on nearly all remaining imports from China. These
components, but could negatively affect certain U.S.
measures could negatively affect China’s economy. Others
import-competing firms and their workers. An undervalued
charge that China has intervened in currency markets to
RMB theoretically might also raise the price of U.S. exports
push down the RMB’s value in order to offset the impact of
to China. However, China’s large purchases of U.S.
U.S. tariff hikes on the U.S. economy.
Treasury securities (which have been a consequence of its
currency policy) have helped the U.S. government fund its
Figure 1. Average Monthly RMB-Dollar Reference
budget deficits, which help keep U.S. interest rates low.
Rates: January 2015-May 2019 (Yuan per Dollar)
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), 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
rate with the dollar on average was 8.28 yuan (the base unit
of the RMB) per dollar, and this rate generally remained
consistent through June 2005. Due in part to pressure from
its trading partners, including the United States, China
announced in July 2005 that it would appreciate the RMB
by 2.1%, peg its currency to a basket of currencies (not just
the dollar), and allow the RMB currency to gradually
Source: Bank of China.
appreciate (described by some as a managed peg), which it
Note: Chart inverted for il ustrative purposes.
did, over the next three years. In July 2008, China halted
Factors Used by Some Analysts to
RMB appreciation because of the effects of the global
economic crisis on China’s exporters, and then resumed
Assess the RMB’s “Valuation”
RMB appreciation in June 2010. From June 2005 through
China’s large trade surpluses and accumulation of foreign
exchange reserves (FERs) have been cited by some analysts
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China’s Currency Policy
as indicators of China’s currency intervention. China’s
dollar globally (REER basis) has likely been the main cause
current account (CA) surplus (which includes the balance of
the RMB’s decline against the dollar on a nominal basis.
trade in goods and services, plus net income and net
transfers) as a percent of gross domestic product (GDP)
Assessments of the RMB’s Value
rose from 1.7% in 2000 to a historic peak of 9.9% in 2007.
Assessments of the RMB’s market valuation against the
It subsequently began to fall sharply over the next few years
dollar and other currencies differ. In July 2011, the
(due in part to the impact of the 2008 global economic
International Monetary Fund (IMF) publicly stated that it
slowdown and efforts by the government to rebalance the
believed that the RMB was “substantially below the level
economy), reaching 0.7% in 2018. Economists contend that
consistent with medium-term fundaments,” with estimates
an important factor in ensuring that large CA surpluses
ranging from 3% to 23%. However, in 2015 the IMF
relative to GDP do not reoccur is to reduce China’s very
assessed the RMB to be “no longer undervalued,” and each
high gross savings rate. That rate fell from 52% in 2008 to
year from 2016-2018, it said that the RMB was “assessed as
45% in 2018, but remains high by international standards.
broadly in line with fundamentals.” In February 2016, the
China’s FERs rose from $166 billion in December 2000 to
Trade Facilitation and Enforcement Act of 2015 (P.L. 114-
a peak of $3.99 trillion in June 2014, but subsequently
125) went into effect. It included several new provisions on
declined to $3.09 billion as of April 2019. In 2018, China’s
monitoring and addressing foreign exchange rates and listed
FERs were equivalent to 23% of its GDP. Some of China’s
new enhanced factors for the Treasury Department to
FERs gone toward the purchase of U.S. Treasury securities.
consider when determining if any country should be listed
China’s holding of these securities rose from $118 billion in
as a currency manipulator in its semi-annual report.
December 2002 to a peak of $1,317 billion in November
Treasury established certain benchmarks to determine
2013, but they declined to $1,121 billion as of March 2019
which countries would be subject to enhanced analysis (and
(a $196 billion decline from their peak).
subject to a monitoring list), including those having a
bilateral trade surplus larger than $20 billion, having a
Figure 2. China’s CA as a Percent of GDP (%)
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
percent of GDP) for enhanced analysis in Treasury’s April
Source: International Monetary Fund.
2016 report. The report urged China to continue to
A broader measurement of the RMB’s movement involves
rebalance the economy by boosting private consumption
and said that “the RMB should continue to experience real
looking at exchange rates with China’s major trading
partners by using a trade-weighted index (i.e., a basket of
appreciation over the medium-term.”
currencies) that is adjusted for inflation, often referred to as
Treasury’s October 2016 report stated that China had met
the “real effective exchange rate” (REER). Such an index is
only one of the criteria (large trade surplus). Treasury’s
useful because it reflects overall changes in a country’s
October 2018 report stated that China’s currency
exchange rate with its major trading partners as a whole—
interventionist policies from 1988 to 2007 promoted and
not just the United States. According to the Bank of
sustained a “significant undervaluation” of the RMB, which
International Settlements, from November 2013 to
imposed “significant and long-lasting hardship on
November 2015, the RMB’s REER rose by 11.9% against a
American workers and companies.” It stated that while the
basket of 61 currencies, even though, on a nominal basis,
RMB on a REER basis had appreciated over the past
the RMB depreciated by 4.6% against the dollar. The
decade, (reducing China’s CA surplus), the RMB on a
RMB’s relative peg to the dollar has often meant that as the
nominal basis had, over the past few months, depreciated
U.S. dollar has appreciated in global markets, so has the
against the dollar to levels last seen a decade ago. Treasury
RMB (even when the RMB has depreciated against the
said that the bilateral imbalances were in part caused by
dollar). In December 2015, China announced that would
China’s distortive economic and trade policies, which limit
establish a new currency index rate (based on 13 foreign
foreign investment and imports. While Treasury expressed
currencies) to help re-orient markets away from the dollar
long-standing frustration with China over its failure to make
by measuring the weighted change in the currency basket.
its currency practices more transparent, it concluded that
From December 2015 to December 2017, the RMB’s
direct intervention by China’s central bank was limited.
REER fell by 6.5%, indicating a broad depreciation of the
Treasury said China would continue to be on its monitoring
RMB. From January to December 2018, the RMB’s REER
list of economies that merit close attention to their currency
appreciated by 0.5% while the U.S. dollar’s REER
practices but did not designate it as a currency manipulator.
appreciated by 10.8%, indicating that the strength of the
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China’s Currency Policy
IF10139
Wayne M. Morrison,
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