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1 (April 18, 2006)

handle is hein.crs/crsmthabcch0001 and id is 1 raw text is: Order Code RS21625 Updated April 18, 2006 CRS Report for Congress Received through the CRS Web China's Currency: A Summary of the Economic Issues Wayne M. Morrison Foreign Affairs, Defense, and Trade Division Marc Labonte Government and Finance Division Summary In response to international pressure over its policy of pegging its currency (the yuan) to the U.S. dollar, the Chinese government on July 21, 2005, announced it would immediately appreciate the yuan to the dollar by 2.1% and adopt a currency policy based on a basket of currencies (including the dollar). Many Members have long charged that China manipulates its currency in order 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 is responsible for the large and growing U.S. trade deficits with China and the loss of U.S. manufacturing jobs. China's July 2005 reforms have done little to lessen congressional concerns. Several bills addressing China's currency have been introduced in Congress, including S.295, which would raise U.S. tariffs on Chinese goods by 27.5% unless China appreciated its currency. This report summarizes the main findings CRS Report RL32165, China's Currency: Economic Issues and Options for U.S. Trade Policy, by Wayne M. Morrison and Marc Labonte, and will be updated as events warrant. Unlike most developed economies, such as the United States, China does not allow its currency to float, i.e., let its exchange rates be determined by market forces. Instead, from 1994 until July 21, 2005, China maintained a policy of pegging its currency (the renminbi or yuan), to the U.S. dollar at an exchange rate of roughly 8.28 yuan to the dollar. 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 Congressional Research Service +o The Library of Congress

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