Many believe thatChina's national currency, the yuan or renminbi (RMB), may be seriously undervalued compared tothe dollar and other major currencies. Many in the United States believe that the large volume of Chinese exports to the UnitedStates is damaging the U.S. manufacturing sector and feeding the U.S. trade deficit. It is difficult to know on a net basis whether the U.S. economy benefits or whether on a netbasis it is hurt from the low cost of products it imports from China. Whether China would be themain country affected, whether the United States and other countries would allow the IMF todetermine their exchange rates, and what impact these rule changes might have on the policies of thecountries with the world's largest economies are matters for speculation. However, they say, the goal is not the attainment of unfair trade advantage but rathercontinued growth in the export sector. Chinese officials have not entered into the debate concerning the "real" value of China'scurrency, though some say there is no convincing evidence that the yuan is undervalued. On July 21, 2005,China's central bank announced a new exchange rate system for China's currency. If the new procedure had been allowed to function as announced, the yuan could haveincreased in value by 30% in five months. Rather, it said, China's newsystem would be a "managed float." Aslong as there is a general expectation that the yuan is underpriced and as long as these speculativeflows continue, Chinese officials are reluctant to allow the market to determine the yuan's value. Congress is currently considering several bills which wouldrequire the United States to limit trade with China if it does not revalue the yuan or direct thePresident to take the yuan-dollar exchange rate issue to the IMF or WTO for action. By contrast, other scholars have found, using essentially the same statistics,that the yuan has been substantially undervalued in recent years. The inflow of funds, in turn, helps generate more demand for imported goods. TheU.S. Others believe, however, that -- while more reformis needed -- China's banking system should be able to accommodate more flexibility in the value ofthe yuan. (95) 
First, the U.S. government might continue pressing China publicly for additional changes inits foreign exchange system in order to make the international value of the yuan better reflect marketconditions and economic realities. This option is predicated on the expectation that reformers willbe able to move China more rapidly towards currency liberalization if China is not pressured fromabroad. Fifth, the U.S. government might refer the issue to theWorld Trade Organization (WTO), alleging that the United States has been injured by unfair tradepractices linked to the undervaluation of China's currency. Arguably, the Treasury Department has shown restraint of this sort when it said, in itsrecent reports, that China was not manipulating the value of its currency. By raising the U.S. price of Chinese imports, they would presumably reducethe flow of Chinese exports to the United States, raise the prices paid by U.S. consumers (perhapshelping some U.S. producers) and stimulate the growth of export industries in other countries thatwould take China's place. It is not clear how much the price of Chinese goods would need to increase, or the volumeof Chinese exports to the United States would decrease, though, if the value of the yuan increased. Some believe, however, that if the United States complained to theWTO that China was manipulating its currency in order to gain unfair trade advantage and the IMFagreed, the WTO could authorize the United States and other countries to put special tariffs onChinese goods.
In recent years, the United States and other countries have expressed considerable concernthat China's national currency (the yuan or renminbi) is seriously undervalued. Some analysts saythe yuan needs to rise by as much as 40% in order to reflect its equilibrium value. Critics say thatChina's undervalued currency provides it with an unfair trade advantage that has seriously injuredthe manufacturing sector in the United States. Chinese officials counter that they have not peggedthe yuan to the dollar in order to gain trade advantages. Rather, they say the fixed rate promoteseconomic stability that is vital for the functioning of its domestic economy.
On July 21, 2005, China announced a new foreign exchange system which is intended toallow more flexibility and to permit the international value of the yuan to be established by marketforces. The yuan was increased in value by 2% and a "managed float" was introduced. However,the value of the yuan has changed little since then. Despite the publication of many studies, scholarsdo not agree whether or by what percent the yuan is undervalued. The wide range of estimatessuggests that there is no reason to believe that any particular figure is correct. It is not clear that theU.S. trade deficit would be lower or U.S. manufacturers would benefit if China raised the value ofthe yuan. In the short run, U.S. producers might be able to sell higher-priced products to U.S.consumers if the inflow of Chinese goods were reduced. In the long run, though, as long as the United States is a net importer of capital, it would have a trade deficit and other countries wouldultimately replace China as suppliers of low-cost goods to the U.S. market.
The Treasury Department has strongly urged China in recent years to adopt procedures thatwould allow the yuan to rise in value. Congress is considering legislation that would penalize Chinaif its currency is not revalued. The United States has pursued the yuan-dollar exchange rate issueas a bilateral U.S.-China issue. Other countries are also affected by the presumably undervaluedyuan -- some more than the U.S. -- but they have allowed the United States to take the lead.
There are at least five ways the United States could deal with the yuan exchange rate issue. Some of these would involve other countries more explicitly in the process. First, the UnitedStates could continue pressing China publicly to raise the value of the yuan on the assumption thatchange will not occur without foreign pressure. Second, it could stop pressing China publicly, on theexpectation that China might move more rapidly towards reform if it is not pressured. Third, theUnited States could restrict imports from China pending action to revalue the yuan. Fourth, the U.S.could ask the IMF to declare that China is manipulating its currency in violation of IMF rules. Fifth,the United States could refer the issue to the World Trade Organization (WTO), asserting that theUnited States has been injured by unfair trade practices linked to the undervaluation of China'scurrency. The WTO, in turn, could authorize trade remedies (tariffs on Chinese goods, for example)aimed at correcting this abuse. This report will be updated as new developments arise.