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1 [1] (October 22, 2018)

handle is hein.crs/crsmthzzbtz0001 and id is 1 raw text is: Cngresoa RearhSevc Updated October 22, 2018 China's Currency Policy China's policy of intervening in currency markets to control the value of its currency, the renminbi (RMB), against the U.S. dollar and other currencies has been of concern for many in Congress over the past decade or so. Some Members charge that China manipulates its currency in order to make its exports significantly less expensive, and its imports more expensive, than would occur if the RMB were a freely traded currency. Some argue that China's undervalued currency has been a major contributor to the large annual U.S. merchandise trade deficits with China (which totaled an estimated $375 billion in 2017) and the decline in U.S. manufacturing jobs. Bills to address foreign currencies deemed to be undervalued have been introduced in every Congress since 2003. China has often been the main target of such legislation, although in recent years, the currency policies of other countries have also come under scrutiny. In the 115th Congress, H.R. 2039 would clarify that U.S. countervailing measures (dealing with government subsidies) could be applied against fundamentally undervalued currencies. As a presidential candidate, Donald Trump stated that he would label China as a currency manipulator on day one. Economic Effects of the RMB's Value The effects of China's currency policy on the U.S. economy are complex. If the RMB is undervalued (as some contend), then it might be viewed as an indirect export subsidy which artificially lowers the prices of Chinese products imported into the United States. Under this view, this benefits U.S. consumers and U.S. firms that use Chinese-made parts and components, but could negatively affect certain U.S. 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-Do lar-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 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 appreciate (described by some as a managed peg), which it did, over the next three years. In July 2008, China halted RMB appreciation because of the effects of the global economic crisis on China's exporters, and then resumed RMB appreciation in June 2010. From June 2005 through June 2015, the RMB appreciated by 35.3% on a nominal basis against the dollar. The yuan-dollar exchange rate has experienced volatility over the past few years. On August 11, 2015, the Chinese central bank announced that the daily RMB central parity rate would become more market-oriented, However, over the next three days, the RMB depreciated by 4.4% against the dollar and it continued to decline against the dollar throughout the rest of 2015 and into 2016. From August 2015 to December 2016 the RMB fell by 8.8% against the dollar. From January to December 2017, the RMB rose by 4.6% against the dollar. However, from April to September 2018, the RMB depreciated by 8.6%. Some analysts link the recent RMB depreciation to the trade conflict that has resulted from the U.S. imposition (and Chinese retaliation) of increased tariffs on $250 billion worth of imports from China in 2018 stemming from the Trump Administration's Section 301 investigation of China policies on intellectual property and technology. Some analysts contend that concerns that the trade conflict will sharply diminish U.S.- China commercial ties (and subsequently slow China's economic growth) is pushing down the RMB's value, while others contend that the Chinese government is intervening in currency markets to push down the RMB's value in order to offset the economic impact of U.S. tariff hikes. Figure I. Average Monthly RMB-Dollar Reference Rates January 201 5- October 2018* (Yuan per Dollar) 6 6.1% 5.4 6.5 G.6 69 - ------ - --- - Source: Bank of China. Note: Chart inverted for illustrative purposes. *October data is the reference rate on October 22, 2018. Factors Used by Some Analysts to Assess the RMB's Valuation China's large trade surpluses and accumulation of foreign exchange reserves (FERs) have been cited by some analysts as indicators of China's currency intervention. China's current account (CA) surplus (which includes the balance of trade in goods and services, plus net income and net transfers) as a percent of gross domestic product (GDP) www.crs.gov 7-5700

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