Despite all the bashing talks, U.S. Treasury refused to name China as a currency manipulator

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The U.S. Treasury Department released its semi-annual exchange rate report, in which the treasury did not cite China as a currency manipulator. The decision came out to the disappointment of many, and citing the reason as that China is making progress on its currency appreciation. Well, I dont want to argue with the decision. The value of the Chinese currency RMB has been pegged to U.S. dollar for a several decades, and from 1994 to 2005, the peg was kept at 8.27 Yuan per dollar, majorly for the purpose of increasing the attractiveness of Chinese exports. However, since 2005, Yuan has been running on a managed float. As you can see in the following chart:

Source: NYU Prof. Michael Waugh

Source: NYU Prof. Michael Waugh

Only about 15 countries keep their currency float, meaning letting their exchange rate solely depending on the supply and demand. Many countries operate their currency on managed float or dirty float, meaning the government, more or less, steps in to intervene the exchange rate. According to Prof.Michael Waugh, there are of course pros and cons of such control of fixed rate. Sometimes countries peg their currency to a well-developed currency such as the U.S. dollar, thus almost equivalent of pegging itself to a set of sophisticated monetary policies. Another advantage for fixing the rate could be eliminating uncertainty for doing businesses in such countries, since investors know in advance what exchange rate to expect in a certain period of time in the future.

The cons of keeping exchange rate fixed could be summarised as the “trilemma”, where a country is going to miss one of three desired financial conditions. The three conditions are fixed exchange rates, free movement of international capital and independent monetary policy. China, for instance, has the fixed exchange rate and relative independent monetary policy, however, it does not enjoy free movement of international capital. Starting in 2010, both Chinese and non-Chinese citizens have an annual exchange limit of $50,000, and can only be done if the applicant show up in person to the proper banks with their government ID. The limit is further broken down to withdraw maximum of $10,000 per day and purchase of $500 per day. Through such central regulation, the Chinese government is able to control the capital flow , and also limit investment flexibility, so it is a double-edged sword.

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