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1 (December 7, 2004)

handle is hein.crs/crsmthabcce0001 and id is 1 raw text is: Order Code RS21625 Updated December 7, 2004 CRS Report for Congress Received through the CRS Web China's Currency Peg: A Summary of the Economic Issues Wayne M. Morrison Foreign Affairs, Defense, and Trade Division Marc Labonte Government and Finance Division Summary The continued rise in the U.S.-China trade imbalance has led to complaints from various U.S. manufacturing firms and workers. Some Members of Congress assert that China's policy of pegging its currency (the yuan) to the U.S. dollar constitutes a form of currency manipulation, maintained to make Chinese exports cheaper, and its imports more expensive, and that this policy has negatively affected U.S. employment in several sectors. This report evaluates that assertion, and considers other effects China' s peg has on the U.S. economy. These include the beneficial effects on consumption, interest rates, and investment spending. Nationwide, these effects should offset job loss in the trade sector, at least in the medium term. Several bills were introduced in the 108th Congress to address China's currency policy. This report summarizes the analysis presented in CRS Report RL32165, China's Exchange Rate Peg: Economic Issues and Options for U.S. Trade Policy, and will be updated as events warrant. China pegs its currency, the yuan (also called the renminbi), to the U.S. dollar. Under this system, China's central bank issues a reference dollar/yuan exchange rate along with a limited band (about 0.3%) in which the reference rate is allowed to fluctuate. This system has been in place with a peg of about 8.3 yuan to the dollar since 1994.1 The Chinese central bank maintains 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 stays the same, despite changing economic factors which could otherwise cause 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 1 Prior to this time, China maintained a dual exchange rate system: an official exchange rate of about 5.8 yuan to the dollar and a market swap rate (used mainly for trade transactions) of about 8.7 yuan to the dollar (at the end of 1993). The reforms in 1994 unified the two rates. Congressional Research Service **o The Library of Congress

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