The purpose of this paper is to study the China's exchange rate system and the rationale of alleged currency manipulation.
China has pegged its currency to the US dollar since 1994. Recently, as the dollar has weakened relative to the Euro, Yen and other currencies, there are much international pressures on the China requiring revaluation of Yuan. Even more, U.S. manufacturers and Congress strongly criticised China for maintaining as artificial exchange rate with the dollar.
Under the IMF Agreement, countries can choose their exchange rate system and are permitted to intervene in exchange rate market when such intervention is necessary to counter disorderly market conditions. In the meanwhile, countries are not permitted to engage in protracted, large-scale intervention.
WTO Regulation also prohibits manipulation of exchange rate as export subsidy under SCM Agreement. For the RMB, US Manufacturers and other Asian countries with Japan urge it is manipulated and could be challenged as actionable subsidy.
The current fixed exchange rate policy is clearly causing problems for China not only through trade friction abovementioned, but also by exacerbating the country's accelerating liquidity growth/over heating economic problems. But despite the international pressures, China will be very cautious about moving on the fixed exchange rate policy. Consequently, feasible option is expected to repeg the renminbi to a basket of currencies in the near future.