Over the past several years, the Chinese government has maintained a policy of intervening in currency markets to limit or halt the appreciation of its currency, the renminbi (RMB) against other major currencies, especially the U.S. dollar. This policy appears to be largely intended to keep China's export industries competitive internationally and to attract foreign direct investment (FDI), which have been major factors behind China's rapid economic growth. This book provides an overview of the economic issues surrounding the current debate over China's currency policy and identifies the economic costs and benefits of China's currency policy for both China and the U.S.

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This book examines the major economic and political factors influencing China's exchange rate policies from the foundation of the People's Republic to the present. It considers how national economic and political priorities, international influences, domestic institutional interests and the new constraints imposed by China's rapidly globalising post-Mao economy determine exchange rate policy. The authors argue that China's exchange rate decisions were not made simply in response to external pressures, rather that they were formed on the basis of domestic assessments of domestic circumstances to serve domestic interests. They go on to illustrate that such decisions are made on the basis of what policymakers perceive are the nation's best interests, and thus constitute dynamic interplay between national priorities and the interests of institutional and non-institutional actors in the policy arena.Fulfilling the demand for further research on how China formulates exchange rate policy, this book will strongly appeal to a wide-ranging audience including: students, academics and researchers with an interest in political economy, Asian studies, international relations, comparative politics, international business and international economics and finance. Policymakers and bankers will also find much to interest them in this book.

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China has a policy of pegging its currency (the yuan) to the U.S. dollar. If the yuan is undervalued against the dollar, there are likely to be both benefits and costs to the U.S. economy. It would mean that imported Chinese goods are cheaper than they would be if the yuan were market determined. This lowers prices for U.S. consumers and diminishes inflationary pressures. It also lowers prices for U.S. firms that use imported inputs (such as parts) in their production, making such firms more competitive. Critics of China's peg point to the large and growing U.S. trade deficit with China as evidence that the yuan is undervalued and harmful to the U.S. economy. The relationship is more complex, for a number of reasons. First, while China runs a large trade surplus with the United States, it runs a significant trade deficit with the rest of the world. Second, an increasing level of Chinese exports are from foreign invested companies in China that have shifted production there to take advantage of China's abundant low cost labour. Third, the deficit masks the fact that China has become one of the fastest growing markets for U.S. exports. Finally, the trade deficit with China accounted for 23% of the sum of total U.S. bilateral trade deficits in 2004, indicating that the overall trade deficit is not caused by the exchange rate policy of one country, but rather the shortfall between U.S. saving and investment. This book presents a coherent examination of the details behind China's currency policies as they relate to outside factors.

While China is still a long way from challenging the dollar's global reserve currency status, as the largest holder of U.S. debt, Beijing is undoubtedly nervous about the prospect of a weaker dollar and is taking steps to diversify its reserves, as well as to internationalize the renminbi. There also seems little doubt that in the next decade China will emerge as a major player in the international financial system. Given the strategic geopolitical and economic implications of these developments, this report attempts to provide a clearer understanding of what is motivating Beijing's current moves, where its policy is likely headed, and the implications for the United States.

China's currency, the renminbi (RMB), has taken the world by storm. The RMB is well on its way to becoming a significant international currency, one that is used widely in international trade and finance. This book documents the RMB's impressive rise, with China successfully adopting a uniqueplaybook for promoting its currency. China's growing economic might, expanding international influence, and the rise of its currency are all intricately connected. The book documents how China's government has tied these goals together, enabling faster progress towards each of them. But there are many pitfalls ahead, both for China'seconomy and its currency. The book shows how the government has so far navigated its way around domestic and international dangers, but enormous risks still lie ahead. The International Monetary Fund has elevated the RMB to the status of an official reserve currency, a currency that foreign central banks use to keep their rainy day funds. If China plays its cards right, with reforms that put its economy and financial markets on the right track, the RMB is going tobecome an important reserve currency that could rival some of the traditional reserve currencies such as the euro and the Japanese yen. But this book argues that there are limits to the RMB's ascendance-the hype about its inevitable rise to global dominance is overblown. The Chinese leadership's apparent commitment to financial sector and other market-oriented reforms-coupled with unambiguous repudiation of political, legal, and institutional reforms-sets the RMB on a clear course. It will attain the status of a reserve currency over time but has essentially givenup its claim of being seen as a safe haven currency, one that investors turn to for safety. The RMB will erode but not seriously challenge the U.S. dollar's dominance in international finance.

Available online
John W. Snow, Treasury Secretary, testified on the Treasury Department’s Report to the Congress on International Economic and Exchange Rate Policies.

Available online
U.S. Senate Committee on Finance hearing that examines China’s currency exchange regime. Witness list includes Stephen Roach, managing director and chief economist, Morgan Stanley; Eswar S. Prasad, Nandlal P. Tolani senior professor of trade policy, Cornell University; Morris Goldstein, Dennis Weatherstone senior fellow, Peter G. Peterson Institute for International Economics; John H. Makin, visiting scholar, American Enterprise Institute.

Since 2005, China has been accused of causing the trade deficit and manipulating the exchange rate. At the same time, there have been arguments against the RMB appreciation. The reason for this conflict is the lack of quantitative research or elaboration on many extremely important indicators. To correctly describe the industrial chain and value-added process around the world, it is necessary to identify data by using new methods and separating the processing trade from the non-processing trade based on the Global Trade Analysis Project (GTAP) data. This book establishes a Global Multi-department Computable General Equilibrium (GMCGE) model based on the continuous global input-output database. It focuses on the Computable General Equilibrium (CGE) model that constructs a consistent interaction mechanism within the economic system and fully reflects the general equilibrium characteristics and thus tries to avoid the limitations of the partial equilibrium model. It shows how the GMCGE framework can distinguish the processing trade from non-processing trade in the input-output data, and at the same time ensure the endogenous equilibrium of the social accounting matrix (SAM) after distinction.

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China has been under heavy international pressure to abandon its currency's de facto peg to the U.S. dollar, since the United States alleged that the undervalued Chinese currency has widened the U.S. trade deficit with China and has cost U.S. manufacturing jobs over the past few years. U.S. policymakers and certain buisness sectors have urged China to revalue its currency. But the Chinese authorities argue that the competitiveness of Chinese goods comes from low labor costs rather than from the exchange rate. Meanwhile, most U.S. and Chinese economists agree that at this moment a sudden rise in the yuan's value would do more harm than good for China, the United States, and the world economy. This is not to say that China does not need to review the yuan's valuation and its exchange rate regime. Apart from external pressure, the yuan experiences and endogenous pressure to appreciate, stemming from the huge inflow of foreign assets--current-account surplus and foreign direct investment (FDI). China's foreign reserves continue to mount and its money supply has skyrocketed. Without a revaluation, these increases may lead to overheating of the economy and may fuel inflation. This is the dilemma Chinese authorities face. It is difficult to determine, however, whether a currency is undervalued or overvalued in a nonmarket economy. The capital account is under strict control in China, and the real foreign exchange market is yet to be established. The yuan's echange rate, which is actually dictated by the government, cannot be regarded as the market equilibrium rate, nor can it serve as a true mirror of the country's real supply and demand for foreign exchange. It is sensible to change the foreign exchange regime itself rather than to change its value. In light of China's fragile financial system both American and Chinese expert urge China's policymakers to accelerate the reform and opening up of the financial sector, allowing more foreign participation. Before hectoring China to lift its capital control and adopt a free-floated exchange rate regime, it is better for developed countries to help China fix its state-owned enterprises, especially the banking sector, established a real foreign exchange market, and create a true market economy. These reforms will provide tangible economic benefits for China and in turn for the United States and global economy.