	Introduction and Overview of the Currency Issue

China's policy of intervention to limit the appreciation of its currency, the renminbi (RMB) against the dollar and other currencies has become a major source of tension with many of its trading partners, especially the United States. Legislation to address China's currency policy has been introduced in every session of Congress since 2003. In recent years, congressional concerns over misaligned (or undervalued currencies) have extended to other countries as well, leading some Members to propose that currency provisions be included in future U.S. trade agreements. China began to gradually reform its currency policy in July 2005, and between then and the end of June 2013, the RMB has appreciated by 34% on a nominal basis (and 42% on an inflation-adjusted basis) against the U.S. dollar. In addition, China's trade surpluses have fallen sharply in recent years and its accumulation of foreign exchange reserves has slowed. However, other analysts contend that the RMB remains significantly undervalued against the dollar and complain that the RMB has appreciated little against the dollar since the end of 2011. 2008: RMB Appreciation Halted

China halted its currency appreciation policy around mid-July 2008 (see Figure 1 ), mainly because of declining global demand for Chinese products that resulted from the effects of the global financial crisis. Concerns in the United States over China's Currency Policy: Trade Deficits and Jobs

Many U.S. policymakers and certain business and labor representatives have charged that the Chinese government "manipulates" its currency in order to make it significantly undervalued vis-à-vis the U.S. dollar, thus making Chinese exports to the United States less expensive, and U.S. exports to China more expensive, than they would be if exchange rates were determined by market forces. Many analysts contend that large increases in China's foreign exchange reserves reflect the significance of Chinese intervention in currency markets to hold down the value of the RMB, which, they argue, has been a major factor behind China's large annual current account surpluses. The House approved a currency bill ( H.R. 2378 ) in the 111 th Congress and the Senate passed one ( S. 1619 ) in the 112th Congress, though neither became law. Legislation in the 113th Congress

			H.R. The bill would require the Treasury Department to issue a semiannual report to Congress on international monetary policy and currency exchange rates, which, in addition to several provisions under current law, would include:
a description of any currency intervention by the United States or other major economies or trading partners of the United States, or other actions undertaken to adjust the actual exchange rate relative to the U.S. dollar; an evaluation of the domestic and global factors that underlie the conditions in the currency markets; with respect to currencies of countries with significant trade flows with the United States and other major global currencies, a determination and designation by Treasury as to which of these are in fundamental misalignment; a list of currencies designated for "priority action"; an identification of the nominal value associated with the medium-term equilibrium exchange rate relative to the U.S. dollar for each currency listed for priority action; and a description of any consultations conducted, including any actions taken to eliminate the fundamental misalignment. But the issue of the possible effects of an RMB appreciation on the U.S. economy is complicated by the fact that there are short-term and long-term implications of RMB appreciation, and that exchange rates are but one of many factors that affect trade flows
To illustrate that exchange rates are only one factor that determine trade flows, one can look at the effect of the 21% RMB appreciation of the RMB to the dollar from July 2005 to July 2008 on U.S.-China trade flows. A fixed or managed float exchange rate whose level is not adjusted when economic conditions change might be viewed as such a distortion. Borrowers

An undervalued RMB also has an effect on U.S. borrowers. Some analysts contend that, although an appreciation of China's currency could help boost U.S. exports to China, it could also lessen China's need to buy U.S. Treasury securities, which could push up U.S. interest rates. For example, it could:
Boost China's term of trade by increasing the level of imports that can be purchased by its exports; Increase economic efficiency (and hence economic growth), by re-directing resources away from inefficient (and often subsidized) sectors of the economy to those that are more efficient and competitive; Lower prices for imported goods and services and expose more of the domestic economy to greater global competition, thus lowering prices for consumers and improving Chinese living standards; Improve the efficiency and competiveness of many Chinese domestic firms (including those that produce only for the domestic market) by lowering prices for imported inputs, raw materials, and machinery, thus boosting their output; Expand the ability of the government to use monetary policies to control inflation and to allocate capital according to its most efficient use through a market-based credit system; Help alleviate the large disparities of economic development between the coastal regions of China (as well as growing income disparities throughout China) that have been driven in part by China's export growth strategy and are viewed by many analysts as posing a potential risk to stability; Reduce or eliminate a major source of tension between China and many of its trading partners, some of whom view China's undervalued currency and its use of subsidies as beggar-thy-neighbor policies that promote economic development in China at the expense of growth in other countries. While this would be unusual, it might be possible. This would cause the U.S. bilateral trade deficit to decline and expand the output of U.S. exporters and import-competing firms. Chinese gross savings levels have declined over the next three years, reaching 50.4% in 2012.
China's policy of intervening in currency markets to limit or halt the appreciation of its currency, the renminbi (RMB), against the U.S. dollar and other currencies has been an issue of concern for many in Congress over the past decade who view it as one of several distortive economic and trade policies that are used to convey an unfair competitive advantage to Chinese producers and exporters. They charge that China's currency policy is intended to make its exports significantly less expensive, and its imports more expensive, than would occur if the RMB were a freely-traded currency. They argue that the RMB is significantly undervalued against the dollar and that this has been a major contributor to the large annual U.S. trade deficits with China and a significant decline in U.S. manufacturing jobs in recent years.
China began to peg the RMB to the dollar in 1994 at about 8.28 yuan (the base unit of the RMB) per dollar and kept the rate constant through July 2005, when, under pressure from its major trading partners, it moved to a managed peg system and began to allow the RMB to gradually appreciate over the next three years. In July 2008, China halted RMB appreciation because of the effects of the global economic crisis on China's exporters. It resumed RMB appreciation in June 2010. From July 2005 through June 2013, the RMB appreciated by 34% on a nominal basis against the dollar and by 42% on a real (inflation-adjusted) basis. Over the past few years, China's current account surplus has declined, and its accumulation of foreign exchange reserves has slowed—factors that have led some analysts to contend the RMB is not as undervalued against the dollar as it once was.
The effects of China's currency policy on the U.S. economy are complex. If the RMB is undervalued (as some contend), then it might be viewed as an indirect export subsidy which artificially lowers the prices of Chinese products imported into the United States. Under this view, this benefits U.S. consumers and U.S. firms that use Chinese-made parts and components, but could negatively affect certain U.S. import-competing firms and their workers. An undervalued RMB might also have the effect of limiting the level of U.S. exports to China than might occur under a floating exchange rate system. The United States is also affected by China's large purchases of U.S. Treasury securities. China's intervention in currency markets causes it to accumulate large levels of foreign exchange reserves, especially U.S. dollars, which it then uses to purchase U.S. debt. Such purchases help the U.S. government fund its budget deficits and help keep U.S. interest rates low. These factors suggest that an appreciation of the RMB to the dollar benefits some U.S. economic sectors, but negatively affects others.
The effects of the recent global financial crisis have refocused attention on the need to reduce global imbalances in savings, investment, and trade, especially with regard to China and the United States, in order to avoid future crises. Many economists contend that China should take greater steps to rebalance its economy by lessening its dependence on exports and fixed investment as the main drivers of its economic growth, while boosting the level of domestic consumer demand (which would increase Chinese imports). A market-based currency policy is seen as an important factor in achieving this goal.
Currency bills aimed at addressing China's currency policy have been introduced in every session of Congress since 2003. The House approved a currency bill in the 111th Congress and the Senate passed one in the 112th Congress. Currency legislation has been proposed in the 113th Congress, including H.R. 1276 and S. 1114. In recent years, congressional concerns about undervalued currencies have moved beyond China to include those of several other countries as well.