China's Exchange Rate Politics

June 16, 2011

On June 19, 2010, the People’s Bank of China (PBOC), the country’s central bank, announced with much fanfare that China would allow the resumption of the renminbi’s (RMB) steady appreciation against the dollar through “a managed floating exchange rate regime” tied to a basket of currencies. Upon the announcement, speculation has focused on the future of the RMB, particularly on how much and how fast the currency would appreciate.

Against this backdrop, Charles W. Freeman III and Wen Jin Yuan conclude that although the announcement last year signaled the Chinese government’s intention to continue its plan to gradually liberalize the RMB exchange rate mechanism, the Chinese central leadership circle has been embroiled in endless debate, with the Chinese Ministry of Commerce and the People’s Bank of China serving as the primary agencies in conflict, on whether China should gradually open its capital market and allow more flexibility in RMB’s exchange rate. As the U.S. bilateral trade deficit with China continues to soar, the RMB’s value has become a significant trade issue between China and the United States. This report aims to decipher the contrasting views within Chinese central leadership circles on the issue of currency reform, in particular the PBOC’s motivations as the main backer of currency reform and the Ministry of Commerce’s efforts to impede reform; and to ascertain the pace and process of China’s currency reform in the future.