China's Currency Policy: An Analysis of the Economic Issues
Wayne M. Morrison
Specialist in Asian Trade and Finance
Marc Labonte
Specialist in Macroeconomic Policy
December 19, 2011



Contents Introduction and Overview of the Currency Issue........................................................................... 1Background on China’s Currency Policy......................................................................................... 22005: China Reforms the Peg.................................................................................................... 22008: RMB Appreciation is Suspended..................................................................................... 32010: RMB Appreciation is Resumed....................................................................................... 4Factoring in Inflation and Trade-Weighted Flows..................................................................... 5Concerns in the United States over China’s Currency Policy: Trade Deficits and Jobs............ 6Legislative Proposals to Address Undervalued Currencies..................................................... 10Legislation in the 112th Congress ............................................................................................ 10H.R. 639/S. 328................................................................................................................. 11S. 1619............................................................................................................................... 12S. 1130............................................................................................................................... 14S. 1238............................................................................................................................... 15The Obama Administration’s Position and Policies ................................................................ 15An Economic Analysis of the Effects of China’s Currency on the U.S. Economy........................ 16Is the RMB Undervalued, and If So, by How Much? ............................................................. 17Why Do Estimates of the RMB’s Undervaluation Differ so Much? ....................................... 18The Debate over the Effects of Exchange Rate Appreciation on Trade Flows and the Deficit................................................................................................................................... 21The Bilateral Trade Deficit Continued to Grow during the Previous Period of RMB Appreciation ......................................................................................................... 21The J Curve Effect............................................................................................................. 22The Role of Exchange Rate Pass-Through........................................................................ 22China’s Role in the Global Supply Chain ......................................................................... 22Underlying Macroeconomic Imbalances Are Unlikely to Disappear................................ 23Differing Opinions on Making RMB Appreciation a Top U.S. Trade Priority ................. 23Winners and Losers of RMB Appreciation from an Economic Perspective............................ 24Effect on U.S Exporters and Import-Competitors............................................................. 25Effect on U.S. Consumers and Certain Producers............................................................. 25Effect on U.S. Borrowers .................................................................................................. 26Net Effect on the U.S. Economy ....................................................................................... 26China’s Perspective and Concerns: Economic Growth and Stability ............................................ 28The Effects of an Undervalued RMB on China’s Economy.................................................... 29Policy Options for the RMB and Potential Outcomes................................................................... 31Current Account Balances, Savings, and Investment .............................................................. 35Chinese Investment and Consumption Relative to GDP................................................... 38Sources of China’s Economic Growth..................................................................................... 41