China

China's Managed Float In 1994 china pegged the value of its currency, the yuan, to the U.S. dollar at an exchange rate of $1= 8.28 yuan. For the next 11 years, the value f the yuan moved in lockstep with the value os the U.S. dollar against other currencies. By early 2005, however, pressure was building for China t alter its exchange rate policy and let the yuan float freely against the dollar. Underlying this pressure were claims that after years of rapid economic growth and foreign capital inflows, the pegged exchange rate undervalued the yuan by as much as 40 percent. In turn, the cheap yuan was helping to fuel a boom in Chinese exports to the West, particularly to the United States where the trade deficit with China expanded to a record $10 billion in 2004. Job losses among American manufacturing companies created political pressures in the United States for the government to push Chinese to let the yuan float freely against the dollar. American manufacturers complained that they could not compete against "artificially cheap" Chinese imports. In early 2005 Senator Charles Schumer and Lindsey Graham tried to get the Senate to impose a 27.5% tariff on imports from China unless the Chinese agreed to revalue the currency against the U.S. dollar. Although the move was defeated, Schumer and Graham vowed to revisit the issue. For its part, the Bush Administration pressured China from 2003 onward, urging the government to adopt a more flexible exchange rate policy. Keeping yuan pegged to the dollar was also becoming increasingly problematic for the Chinese. The trade surplus with the United States, coupled with strong inflows of foreign investment, led to a surge of dollars into China. To maintain the exchange rate, the Chinese central bank regularly purchased dollars from commercial banks, issuing the yuan at the official exchange rate. As a result, by mid 2005 China's foreign exchange reserves had risen to more than $700 billion. The Chinese were reportedly buying...