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Renminbi / Yuan

Unlike the United States and many other countries, China uses a different word - yuan [the usual translation for the word "dollar"] - for the unit in which product prices, exchange rates, and other such values are denominated from the word used for its currency, the renminbi (RMB) - literally "people's currency". One Renminbi (also known as 1 Yuan) equals 10 chiao/jiao, ), and one jiao is divided into 10 fen. So 3.45 yuan would be spoken of as "3 yuan 4 jiao 5 fen", as opposed to "3 yuan 45 fen". Notes are in the denominations of RMB500, 100, 50, 20, 10, 5, (2 and 1 are old). Coins are in denominations of RMB1, and 5 and 1 chiao/jiao. In spoken Chinese, "yuan" is often called as "kuai" and the "jiao" as"mao".

The People's Bank of China declared at a press conference in Beijing on 30 August 2005 that the new print of fifth version of Renminbi (1999 version), in 100 yuan, 50 yuan, 20 yuan, 10 yuan and five yuan notes and one jiao coins, would be in circulation as of August 31. The central bank explained that the main picture and color of the new bill would remain the same as those in use, but with technological advancement.

On Saturday 19 June 2010, the People's Bank of China announced plans to allow greater flexibility in exchange rates, appearing to buckle under criticism that its currency policies keep the yuan undervalued against the dollar to give Chinese exporters an unfair advantage in overseas markets. Since that decision, the yuan advanced Monday against the dollar to its highest level in over four years... but then edged lower on Tuesday in global markets. Despite the new policy, China is likely to move ahead very cautiously. An undervalued yuan provides Chinese manufacturers with an export subsidy and is a disguised tariff on imports. China has used its currency as a development tool which harms businesses in the United States. Artificially low prices for Chinese goods benefit US consumers, but are unfair to U.S. producers whose products must compete with the Chinese imports. Many analysts argue that China's exchange rate is considerably undervalued and that it needs to appreciate for the current account balance to adjust to a path that can be sustained permanently.

An increase in the value of the yuan relative to the dollar would make U.S. exports to China less expensive and it would make US imports from China more expensive. The price of Chinese goods in the United States would not change by as much as the change in the exchange rate, because only a portion of most exports from China are produced in China, and because the retail price in the United States includes marketing, transport, and other logistical costs. And with a higher yuan, substitutes for Chinese products would likely come from countries other than China.

China set the yuan-dollar exchange rate at an artificially low value in 1994 and fixed that rate from 1995 to 2005. The rate was pegged at about 8.28 yuan/dollar for the entire period. Thus, as the dollar has appreciated or depreciated in value relative to other currencies, such as the Euro, the yuan has appreciated or depreciated by the same amount relative to these other countries. To maintain this fixed exchange rate, the central bank of China has had to intervene in the foreign exchange market. It sells yuan in exchange for dollar denominated assets when the demand for the yuan increases and it buys yuan with dollar denominated assets when the demand for the yuan decreases. Recently the central bank has intervened very heavily in the markets to prevent the yuan from appreciating. Since the end of 2001, dollar buying had been so great that the foreign reserves held by the Chinese government had risen by $153 billion to over $360 billion.

US imports from China are equal to about 1 percent of US GDP, or 11 percent of total US imports. Although this share may seem small, China's imports to the US have increased rather rapidly, between 20 and 25 percent in the 1990s. In general, these imports result from China using low-skilled labor to assemble and process imported parts and materials originating in other countries-mostly from other Asian countries that have traditionally exported directly to the US. Consequently, the share of US imports from these other countries has declined as China's share has increased. Asia's share of US imports declined slightly. Much of the increase in US imports from China has come at the expense of imports that once came directly from other Asian countries.

CBO's 2008 analysis indicated that the offset from 1998 through 2005 was roughly one-third-that is, about one-third of the increase in the share of imports from China was offset by a decline or reduced growth in the shares of imports from other countries [is substantially smaller than previous estimates in the literature, which ranged from 75 percent to a little over 90 percent for earlier periods].

China has a large trade surplus with the United States. However, because China has a large deficit with the rest of the world, it does not have a large overall current account surplus. China's bilateral trade surplus was $103 billion in 2002 with the U.S. while China's deficit with the rest of the world was about $73 billion. Thus, China's current account surplus was under 3 percent of GDP in 2002 and likely to decline to less than 2 percent in 2003. Many imports from China are goods from other Asian economies that are processed or finished off in China before shipping to the United States. Other East Asian economies increasingly send goods to China for final processing before they are shipped to the United States. China accounted for 11 percent of US imports in 2002, up from 3 percent in 1990. Meanwhile, the combined share of Japan, Korea and Taiwan declined to 17 percent from 27 percent over the same period.

On July 21, 2005, China revalued the renminbi slightly and moved to a "crawling peg" regime. Under that regime, the People's Bank of China limited the amount of deviation in the exchange rate on any given day-initially to 0.3 percent and then, starting on May 21, 2007, to 0.5 percent-resulting in a gradual appreciation of the renminbi. From July 2005 to mid-2008, China permitted some modest revaluation of the yuan, which moved from 8.111 to the dollar on 25 July 205 to 6.9044 on 13 July 2008. However, the yuan remains significantly undervalued. the roughly 20 percent appreciation in its currency's value that has occurred since then has translated into only a small increase in the dollar price of U.S. imports from China.

The value of imports from China quintupled between 1997 and 2007, rising from $65 billion to $342 billion. By comparison, during the same period, the value of such imports from other countries doubled, growing from $825 billion to $1,664 billion. By 2007, China was the largest supplier of US imports, accounting for 17 percent of all imported manufactured goods.

A review of the relevant literature indicates that the average domestic value added of Chinese exports to the United States is probably between 35 percent and 55 percent. As a result, a 20 percent revaluation of the renminbi (for example) would cause the average price of imports from China to rise by roughly 7 percent to 11 percent.

Since 2008, the value of the yuan has not changed appreciably, closing at 6.8262 by 01 March 2010. As the dollar has weakened so has the RMB keeping China competitive in export markets but making it increasing difficult for other countries to sell into China.

China can manage the value of the yuan at 4, a value closer to balance of payments equilibrium, as easily as it does 6.8. Shaghil Ahmed, in a December 2009 Federal Reserve System International Finance Discussion Paper, found that if the trade-weighted real renminbi had appreciated at an annual rate of 10 percent per quarter since mid-2005 [instead of the annual rate of 5 1/2 percent actually observed], Chinese real exports would have been roughly 30 percent lower today. Thus greater exchange rate flexibility could contribute to lowering China's huge trade surplus through restraining growth of exports.

On 05 March 2010 Premier Wen Jiabao reaffirmed that China will continue to keep the yuan "basically stable". Central bank Gov. Zhou Xiaochuan said 06 March 2010 that the current policy - which kept the yuan's value unchanged against the dollar since July 2008 - was a "special measure" adopted in unusual circumstances. "This is a part of our package of policies for dealing with the global financial crisis," he said. "These kinds of policies sooner or later will be withdrawn."

The US Treasury faces a twice-yearly decision on whether to formally label China a "currency manipulator." US trade law has required the report "International Economic and Exchange Rate Policies" since 1988. Under the law, if Treasury finds that a country has significantly harmed U.S. trade through foreign exchange rate manipulations, the secretary is required to begin "expedited" negotiations to change the practice.



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