Chinese Foreign Economic Policy

Despite being lead by the Chinese Communist Party, The People's Republic of China has gradually liberalized its foreign economic policy since 1978 and the rise of Deng Xiaoping. Before the mid 70's, the PRC was relatively autarchic, largely due to Chinese isolation after the Sino-Soviet split and the Cultural Revolution, when China suspended all diplomatic ties. In 1978, Deng Xiaoping started his policy of "Reform and Opening up" which started the gradual transformation of China's economy from relative autarchy and central planning, to an open, liberal, free market economy. In 2001, China became a member of the WTO, and recently China has become the second largest economy in the world, behind the United States.

China's Foreign Monetary Policy

Up until 2005, China maintained a fixed exchange rate regime, pegging the value of the Renminbi to the US Dollar. In July of 2005, the People's Bank of China announced that it would remove the Reminbi's peg against the dollar, and allow its value to be determined by a basket of currencies which included the Euro, the US Dollar, the Japanese yen, and the South Korean won, among others. In the three years that followed, the value of the yuan rose by 21%. Then in July 2008, the China's central bank reinstated the peg to the dollar in response to the deepening of the global financial crisis, especially in the United States. This move was likely done as a caution against large capital flows that could destabilize China's economy, a lesson that China by watching the rest of Asia learn during the Asian financial crisis of 1997-1998. Chinese policy-makers attribute the fact they were largely unaffected by this crisis to their currency peg. Until June 2010, China maintained its currency peg by buying US Dollars and maintaining its capital controls that limit the convertability of the yuan, slowing down any "hot capital" that could potentially destabilize their economy. Then on June 19, 2010, in a move seen largely in response to pressure from the United States to revalue the yuan, the People's Bank of China again announced that it discontinue the Renminbi's peg to the dollar and resume its highly managed float based on a basket of currencies.

Under the new regime, every morning, the PBOC sets a dollar parity for the yuan, and allows it to be traded relatively freely; it is prepared to allow the yuan to rise by 0.5% in a single day. Of course, this is a managed float, and the PBOC has "corrected" for the effects of supply and demand on many occasions. On the first day of trading after the yuan became unpegged, its value rose 0.4% against the dollar, a rate at which its value would have doubled after 174 days. However, the next day, Chinese state-owned banks stepped in by buying dollars, pushing the yuan's value down again. This new exchange rate regime still has a highly managed character to it, allowing critics to say that this is largely a superficial change made for political purposes, and that the PBOC can still manipulate the yuan's value to protect domestic interests. To date, the value of the RMB has risen by about 2%.