The Chinese currency has been pegged to the U.S. dollar, first unofficially and later officially, with a band of 0.5% since 1995. Since July 21, 2005, the mid-rate of the peg has been 8.11 yuan per dollar (as of February 2014). Prior to that, the mid-rate had been 8.277 yuan per dollar. In the 1980s, the rate had been 2 yuan per U.S. dollar. The Chinese central bank ensures that the predetermined exchange rate is maintained through targeted foreign exchange market interventions.
The fixed exchange rate system initially gave China great advantages both in fighting inflation and in accessing international capital, as China's exchange rate policy is considered very credible. The high inflows of foreign capital in recent years were not least due to the low currency risk. The renminbi even survived the Asian crisis without devaluing. In recent years, however, international pressure on China to abandon the dollar peg and let its currency float freely (and thus presumably appreciate) has increased. The U.S., the EU and China's Southeast Asian neighbors, in particular, are calling on the country to free float the renminbi yuan, which they believe is now severely undervalued. However, since Chinese monetary policy indirectly supports the U.S. national debt through dollar purchases, a revaluation of the renminbi would have ambivalent consequences for the United States.
Most studies (for example, also the Economist's Big Mac Index) show a considerable undervaluation of the Chinese currency, which gives the country a significant cost advantage over its economic competitors. However, the Chinese central bank has repeatedly announced that it will not be pressured to reform the exchange rate system, and that a restructuring of the system will depend on China's economic situation and the state of its financial market. In this context, the government and the central bank do not view the exchange rate peg in isolation, but as a component of several economic policy measures, including substantial capital controls.
In July 2005, the central bank responded to market pressure and allowed the renminbi to appreciate slightly by 2.1%. For the future, the bank announced a transition to a currency basket system. According to initial announcements by Zhou Xiaochuan, governor of the central bank, in August 2015, the currency basket was to include more than ten currencies, primarily the U.S. dollar, euro, Japanese yen, and South Korean won. However, a very strong focus on the U.S. dollar was still observed. Since the completely fixed peg was loosened, the renminbi had appreciated by about nine percent by July 2007. In 2007, the renminbi appreciated by a further six percent against the dollar, while also depreciating by six percent against the euro, as the euro gained twelve percent per dollar. The Chinese exchange rate regime in 2007 was roughly equivalent to a currency basket with an equal weighting of the dollar and the euro.
In June 2010, the Chinese central bank announced on its website that it would press ahead with exchange rate policy reform and increase the flexibility of the exchange rate. The announcement was well received internationally. On June 22, 2010, the Chinese central bank raised the daily rate against the dollar by 0.42%. In Paul Krugman's assessment, this has by no means changed Chinese monetary policy in principle; at worst, he sees only trade sanctions as a possible response.
Even at the annual meeting of the International Monetary Fund in October 2010, differences over Chinese monetary policy could not be resolved. The United States of America in particular renewed its criticism of the undervaluation of the renminbi, and experts warned of a "currency war." On October 13, 2010, the Chinese central bank set the exchange rate at 6.6693 yuan, which means that the renminbi yuan has reached its highest value since the introduction of the dollar peg.
From August 2010 to August 2011, the yuan appreciated by five percent against the dollar. The rate was 6.434 yuan/dollar (0.1554 dollar/yuan). Experts still consider the currency to be strongly undervalued, but believe that the Chinese central bank will gradually abandon its interventions; moreover, liberalization of China's foreign trade would turn the renminbi into a freely convertible currency.
From 2015
On August 11, 2015, the Chinese central bank surprisingly devalued the renminbi yuan by 1.9 percent, followed by another devaluation of 1.6 percent the following day. The move, it said, was intended to move closer to market-based mechanisms and align with currency traders' expectations. This was another "building block of the fiscal reform program." Observers, however, feared that this would fuel a new currency war, which the Chinese side described as "completely exaggerated.
In order to make its currency one of the international reserve currencies, the Chinese central bank decoupled it from the US dollar in 2015. Since then, the value of a renminbi yuan has been determined by a new currency basket, in which the US dollar is still the largest single currency. The US dollar, euro and yen make up about half of the currency basket. The currency basket was named after the "China Foreign Exchange Trade System" and is referred to as the "CFETS RMB Index". The share of the individual currencies corresponds to the trade volume of the respective country with China.
On November 30, 2015, the International Monetary Fund (IMF) declared the renminbi the global reserve currency alongside the U.S. dollar, euro, British pound, and yen. With this status, it can be applied more frequently in global trade and financial system. On October 1, 2016, the renminbi became the fifth currency to be included in the IMF's World Currency Basket.
According to the "Report on RMB Internationalization in 2020" published by the People's Bank of China in late August 2020, the People's Bank of China has established RMB clearing banks in 25 countries and regions outside mainland China by the end of 2019.
- "people's currency", casually 'people's money') is the currency of the People's Republic of China and is issued by the People's Bank of China. As "people's money" it was distinguished from the waibi, (外幣 / 外币, wàibì), which existed parallel to it in the same denomination, casually the "foreign money", correctly the foreign currency or foreign exchange, which was reserved for foreigners.
