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1 (February 13, 2007)

handle is hein.crs/crsmthabcci0001 and id is 1 raw text is: Order Code RS21625 Updated February 13, 2007 SCRS Report for Congress 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 Many Members of Congress charge that China's policy of buying foreign reserves 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 and has been a major factor in the loss of U.S. manufacturing jobs. Threats of possible congressional action led China to make changes to its currency policy in July 2005, which has resulted in a modest appreciation of the yuan. However, many Members have expressed dissatisfaction with the pace of China's currency reforms and have warned of potential legislative action. This report summarizes the main findings CRS Report RL32165, China's Currency. Economic Issues and Options for U.S. Trade Policy and will be updated as events warrant. 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 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 at the end of 2003 to nearly $1.1 trillion at the end of December 2006) and China's large trade surplus (which totaled $178 billion in 2006) are indicators that the yuan is undervalued. Congressional Research Service . The Library of Congress Prepared for Members and Committees of Congress

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