China's Currency: A Summary of the Economic Issues

Many Members of Congress charge that China's policy of accumulating foreign reserves (especially U.S. dollars) to influence the value of its currency constitutes a form of currency manipulation intended to make its exports cheaper and imports into China more expensive than they would be under free market conditions. They further contend that this policy has caused a surge in the U.S. trade deficit with China in recent years and has been a major factor in the loss of U.S. manufacturing jobs. Although China made modest reforms to its currency policy in 2005, resulting in a gradual appreciation of its currency (about 19% through June 3, 2009), many Members contend the reforms have not gone far enough and have warned of potential punitive legislative action. Although an undervalued Chinese currency has likely hurt some sectors of the U.S. economy, it has benefited others. For example, U.S. consumers have gained from the supply of low-cost Chinese goods (which helps to control inflation), as have U.S. firms using Chinesemade parts and materials (which helps such firms become more globally competitive). In addition, China has used its abundant foreign exchange reserves to buy U.S. securities, including U.S. Treasury securities, which are used to help fund the Federal budget deficit. Such purchases help keep U.S. interest rates relatively low. For China, an undervalued valued currency has boosted exports and attracted foreign investment, but has lead to unbalanced economic growth and suppressed Chinese living standards. CRS Report for Congress