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On 21 July 2005 Beijing made its biggest monetary shift in more than a decade by revaluing the Chinese currency, the yuan (also known as the renminbi) : it reset the fixed value of its currency and dropped the fixed exchange rate, or peg, with the U.S. dollar. Nevertheless, the Chinese government has still set tight parameters on how much the yuan can rise. While the United States, Japan, and the European Union have pressured China to institute further revaluations, Beijing has been reluctant to make more changes due to concerns that a currency appreciation would lead to slower export growth, higher unemployment, and, over time, a decline in foreign direct investment.
This article will explore the future of U.S.-Asian trade imbalances by examining how China's central bank has managed the yuan exchange rate in the past. second, it will analyze the significance of China's undervalued yuan. Last, it will examine why further revaluations are needed and which outside pressures will affect China's decision to revalue.
China's central bank, the People's Bank of China (PBOC), is a government agency that oversees the banking system and is responsible for regulating the money supply in the economy, issuing currency, and managing the exchange rate. Central banks regularly engage in international financial transactions called foreign exchange interventions in order to influence exchange rates. While in the current international financial environment some exchange rates float freely, fluctuating from day to day, most operate under a managed float regime. Specifically, under a managed float (sometimes also known as a "dirty float"), the central bank attempts to influence exchange rates by buying and selling currencie ...