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Since the Chinese economic reforms of 1978, China has become the world's biggest
exporter, second largest economy and biggest manufacturer in the world.
the renminbi was pegged to the U.S. dollar at ¥2.46 per USD
(note: during the 1970s it was revalued until it reached ¥1.50 per USD in 1980).
Since 2005, the Chinese government has overturned its previous policy of pegging the
Renminbi to the US dollar.
The renminbi now floats within a small margin compared to a basket of currencies
selected by the Chinese government.
The Renminbi has appreciated 22 percent since the mechanism reform in 2005 of the
Yuan exchange rate.
After 2010, the exchange rate floated in line with fundamentals, staying mostly
between 6 and 7 CNY per USD.
In 2018, the renminbi lost value as China's exports were targeted by USA tariffs and
markets had doubts on the strength of the economy !!!!!!!
Such a depreciation is typical of a country whose exports are at risk, as shown by the
drop of the pound after Brexit, and in July 2019 the IMF found the yuan to be correctly
valued, while the dollar was overvalued.
In August 2019, the central bank of China (PBOC) let the renminbi fall over 2 % in
three days to the lowest point since 2008 as it was hit by strong sales after threats of
further USA tariffs.
International consequences
Peterson Institute of International Economics study said in 2010 that the yuan was 20
percent undervalued versus the dollar.
As a member of the WTO and IMF, China's undervalued renminbi would violate
and Article IV Section 1 of the IMF that prohibiting countries from currency
manipulation.
However, the USA Treasury in 2018 cleared China from the accusation of currency
manipulation.
The trade dispute with the U.S. would be worsened by an undervalued renminbi.
In an effort to hold the value of the yuan comparatively low, the government has to
buy foreign currencies through trade surpluses and investment.
China’s foreign reserves, already the world's biggest, soared to $2.8 trillion at the end
of 2010.
In order to buy foreign currencies, the government has to print the RMB “at a
furious pace” and therefore incur inflation.
However, between 2012 and 2019, China's inflation has been persistently low, around
2 %.
An undervalued renminbi would contribute to very large portfolio foreign capital inflows,
motivated by expectations of quick appreciation, adding pressure for the currency to
rise.
Chinese economic reforms in the late 1970s propelled the Chinese economy from a
closed centrally planned economy to one opened to foreign investments and capital,
oriented to manufacturing of electrical goods, textile, toys and exports.
This has allowed China to become a creditor country in relations to current accounts
and the largest in terms of foreign reserves.
China says that its population receives high savings from the structure of the economy,
and that gradual increase in domestic consumption is important for its own growth.[29]
While the Chinese have argued that their exchange rate is purely a domestic policy
matter, economists have begun to suggest that Chinese policy will soon shift to
accelerate appreciation of the Yuan in order to reduce domestic inflation and to
increase the wealth of Chinese citizens.
They likened it to the unequal treaties signed after the Boxer rebellion and the First and
Second Opium Wars.