China's Currency: Economic Issues and Options for U.S. Trade Policy [June 14, 2007] [open pdf - 281KB]
"The continued rise in China's trade surplus with the United States and the world, and complaints from U.S. manufacturing firms and workers over the competitive challenges posed by Chinese imports have led several Members to call for a more aggressive U.S. stance against certain Chinese trade policies they deem to be unfair. Among these is the value of the Chinese yuan relative to the dollar. From 1994 to July 2005, China pegged its currency to the U.S. dollar at about 8.28 yuan to the dollar. On July 21, 2005, China announced it would let its currency immediately appreciate by 2.1% (to 8.11 yuan per dollar) and link its currency to a basket of currencies (rather than just to the dollar). […] The relationship is more complex, for a number of reasons. First, an increasing level of Chinese exports are from foreign-invested companies in China that have shifted production there to take advantage of China's abundant low cost labor. Second, the deficit masks the fact that China has become one of the fastest growing markets for U.S. exports. Finally, the trade deficit with China accounted for 26% of the sum of total U.S. bilateral trade deficits in 2006, indicating that the overall U.S. trade deficit is not caused by the exchange rate policy of one country, but rather the shortfall between U.S. saving and investment. That being said, there are a number of valid economic arguments why China should adopt a more flexible currency policy. For a brief summary of this report, see CRS [Congressional Research Service] Report RS21625, 'China's Currency: A Summary of the Economic Issues'. This report will be updated as events warrant."
CRS Report for Congress, RL32165