The Exchange Rate Regime

This chapter describes the evolution of China’s exchange rate policy. The RMB was pegged to the U.S. dollar from 1994 until 2005. Since then, the RMB has in principle been allowed to float in response to market forces but in practice still remains tightly managed relative to the dollar. This chapter documents the stages in which the RMB’s exchange rate has been made more flexible, although China’s central bank continues to this day to intervene in foreign exchange markets to prevent sharp movements in the currency’s value. The chapter shows how China’s exchange rate policy has become a matter of contention in U.S.-China relations. The chapter describes the PBC’s attempts to reform and increase the flexibility of the exchange rate, and how this has had certain unintended consequences.