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1 [1] (May 18, 2015)

handle is hein.crs/crsuntaajry0001 and id is 1 raw text is: Congressional Research Service I~nform ig h legislative debate since 1914, S May 18, 2015 China's Currency Policy China's policy of intervening in currency markets to limit or halt the appreciation of its currency, the renminbi (RMB), against the U.S. dollar and other currencies has been an issue 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 the RMB is significantly undervalued against the dollar and that this has been a major contributor to the large annual U.S. merchandise trade deficits with China (which was $343 billion in 2014) and the decline in U.S. manufacturing jobs. Legislation to address foreign currencies deemed to be undervalued has 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 114th Congress, H.R. 820, S.433, and S. 1267 would seek to treat certain undervalued currencies as an actionable subsidy under U.S. countervailing laws. Economic Considerations 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 might also have a more limiting effect on the level of U.S. exports to China than might occur under a floating exchange rate system. 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. The RMB's Exchange Rate China has pegged the RMB to the dollar for several years. Each day China's central bank announces a central rate of exchange between the RMB and the dollar 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 was generally maintained consistently 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 2.10%, 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 December 2014, the RMB appreciated by 34% on a nominal basis against the dollar, although the rate of appreciation has slowed in recent years. In 2014, the RMB depreciated by 0.2% against the dollar over 2013 levels. During the first four months of 2015, the exchange rate averaged 6.23 yuan per dollar. Some analysts speculate that the Chinese government has sought to slow, and sometimes reverse, the pace of RMB appreciation due to concerns over a slowing Chinese economy (and its impact on exporters) and to deter illegal capital inflows from outside speculators who expect that the RMB will continue to rise and hope to profit from it. The Chinese government appears to be concerned that such inflows could lead to volatile and unpredictable movements in the RMB's value. Figure I. Average Annual RMB-Dollar Exchange Rates: 2004-2014 (Yuan per Dollar) 5.5 6.06.15 6.16 6.0 6.5 6i ... 6.95 7.0 7.6 7.5 7 7.97 8.0 8.5 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Global Insight. Notes: Chart inverted for illustrative purposes. A broader measurement of the RMB's movement involves looking at exchange rates with China's major trading partners by using a trade-weighted index (i.e., a basket of currencies) that is adjusted for inflation, often referred to as the effective exchange rate (EER). Such an index is useful because it reflects overall changes in a country's exchange rate with its major trading partners as a whole- not just the United States. According to the Bank of International Settlements (BIS), from July 2005 to April 2015, the RMB's EER rose by 43% against a basket of 61 trading economies; and from December 2013 to April 2015, it increased by 10%. China's relative peg to the dollar has meant that as the dollar has depreciated or appreciated against a number of major currencies, the RMB has depreciated or appreciated against them as well. 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 www.crs.gov 1 7-5700

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