After China announced the exchange rate reform on 21 July 2005, the Congress’s pressure on China’s currency waned gradually. There were two bills after the announcement in 2005 and only one bill in 2006 to target the RMB issue.
The first bill, H. R. 3283 the United States Trade Rights Enforcement Act, introduced on 28 July was a revised bill of 14 July. Similar to the previous bills in the first half of 2005, the 14 July bill condemned China’s currency manipulation and urged China to move to market- based exchange rate regime. By contrast, the 28 July bill changed the rhetoric and remarked that China’s transition to a more flexible exchange rate was “a welcome move” and “positive
development”.255 The bill also required the Treasury to further investigate China’s exchange
rate mechanisms, including the basket of foreign currencies and the degree to which the RMB moved to the market-based value. The other bill (S. RES. 270) on 6 October 2005 continued
255 The US Congress, “H. R. 3283 United States Trade Rights Enforcement Act: To enhance resources to enforce
United States trade rights”, 28 July 2005, retrieved from http://www.gpo.gov/fdsys/pkg/BILLS- 109hr3283eh/pdf/BILLS-109hr3283eh.pdf (accessed 18/09/2016).
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to urge the IMF to investigate whether China was manipulating the exchange rate between the yuan and the dollar.256
The only bill related to the RMB in 2006 was the United States Fair Currency Practices Act of 2006 (S. 3992). The bill clarified the definition of exchange-rate misalignment, elaborated the way to determine whether exchange-rate misalignment was occurring and
mandated the corresponding measures of Treasury and President.257 While the 2006 bill still
highlighted China’s massive intervention in the foreign exchange market to keep its currency undervalued, it did not include any strict clause such as retaliatory tariffs on China’s products, like those in 2005.
Even though the Congress became less concerned with China’s currency after the 21 July 2005 announcement, the Treasury kept a close eye on the subsequent development of China’s exchange rate reform. The November 2005 Report commended China’s 21 July announcement to initiate the market-determined currency reform in the key findings, but it
also pointed out that “China’s actual operation of its new system was highly constricted”.258
Specifically, the Report found that the new RMB exchange rate mechanism remained a tightly managed currency peg against the dollar, as the initial adjustment was small, the subsequent movements of the RMB were limited and the currency basket seemed not to play a significant role. The Report repeated the proposal that more exchange rate flexibility was necessary to
256 The US Congress, “S. RES. 270: Expressing the sense of the Senate that the International Monetary Fund
should investigate whether China is manipulating the rate of exchange between the Chinese yuan and the United States dollar”, 6 October 2005, retrieved from https://www.congress.gov/109/bills/sres270/BILLS- 109sres270is.pdf (accessed 18/09/2016).
257 The US Congress, “S. 3992 United States Fair Currency Practices Act of 2006: To amend the Exchange Rates
and International Economic Policy Coordination Act of 1988 to clarify the definition of manipulation with respect to currency, and for other purposes”, 28 September, retrieved from
https://www.congress.gov/109/bills/s3992/BILLS-109s3992pcs.pdf (accessed 18/09/2016).
258 US Department of the Treasury, “Report to Congress on International Economic and Exchange Rate
Policies”, November 2005, retrieved from https://www.treasury.gov/resource-center/international/exchange- rate-policies/Documents/112005_report.pdf (accessed 18/09/2016), p.2.
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give China a sufficiently autonomous and effective monetary policy to sustain growth and avoid inflation.
Subsequent Reports confirmed the 2005 November Report’s observation that China’s actual operation was not consistent with its 21 July announcement of exchange rate reform. For example, the 2006 May Report recognized that on the one hand, Chinese leaders made firm commitment and delivered clear statements to move towards a more flexible exchange rate; on the other hand, they consistently emphasized the gradual adjustments in managed RMB exchange rates. Therefore, the Treasury closely monitored the progress made on China’s
exchange rate regime and continued the intensive engagement with China in 2006.259
With regard to the IMF, one can also identify a trend whereby less pressure was placed on China’s exchange rate policy in 2006. In the 2006 Article IV Consultation Report, the IMF recognized that Chinese government had undertaken several reforms to deepen the foreign exchange market though they emphasized that exchange rate reform would have to be gradual and controllable. The IMF advocated greater exchange rate flexibility and aimed to address China’s concern with the potential negative impact of substantial appreciation on China’s economy. On the one hand, the staff did not accept the analogy that China would embrace a lost decade like Japan in the manner that a significant RMB appreciation could push the economy into deflation and prolonged recession. On the other hand, the staff stressed that exchange rate flexibility, not just appreciation, was imperative for China’s economic rebalancing. Greater flexibility of exchange rate would also contribute to the
259 “Statement of Treasury Secretary John W. Snow before the Senate Committee on Banking, Housing, and
Urban Affairs on International Economic and Exchange Rate Policies”, 18 May 2006, retrieved from https://www.treasury.gov/press-center/press-releases/Pages/js4271.aspx (accessed 18/09/2016).
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sustainability of China’s growth by helping to the rebalance the economy over the medium term.
To summarise, though the Treasury was not satisfied with the pace of China’s exchange rate reform and maintained the engagements with the Chinese leadership, international pressure from the Congress and the IMF on the RMB exchange rate generally decreased from July 2005 to 2016. It reinforced the argument that international factors played an agenda-setting role in China’s exchange rate policymaking while China’s domestic politics determined the pathway of the exchange rate reform. In other words, external pressure was strongly mediated by the domestic institutions. The next two sections will respectively examine the relationships between the two key ministries (MOFCOM and PBOC) and the subsequent exchange rate reform.