China's Exchange Rate Policy Dilemma

Abstract

This paper summarizes key aspects of China’s exchange rate policy, outlines the problems it creates for both China and the global economy, and proposes a feasible policy compromise. China’s Currency Regime On July 21, 2005, China announced a 2.1 percent appreciation of the Renminbi (RMB) against the US dollar, a move to a managed float, and a number of other “reforms. ” Most of these “reforms ” simply reiterated long-standing arrangements: since 1994 China has identified its currency regime as a managed float and has set a 0.3 percent per day fluctuation limit (in either direction) for the RMB against the dollar (vis-à-vis the central parity). The July 21 st announcement, however, did pledge two potentially important alterations: (i) the RMB was henceforth to be managed “with reference to a basket of currencies ” rather than being pegged to the dollar; and (ii) the exchange rate was to become “more flexible, ” with its value based more on “market supply and demand.” In practice, the July 21 st reforms have so far had little visible effect. As of mid-

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