On Thursday, July 21, the yuan was revalued higher against the US dollar when China announced it would no longer have its currency tied to a fixed rate against the US dollar and instead will be using a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. The People’s Bank of China will announce the closing price of a foreign currency, such as the US dollar, traded against the yuan in the inter-bank foreign exchange market after closing of the market on each working day, and will make it the central parity for the trading against the yuan on the following working day.
The daily trading price of the US dollar against the yuan in the inter-bank foreign exchange market will continue to be allowed to float within a range of 0.3% around the central parity published by the People’s Bank of China, while the trading prices of the non-US dollar currencies against the yuan will be allowed to move within a certain range announced by the People’s Bank of China. The exchange rate of the US dollar against the yuan was adjusted to 8.11 yuan per US dollar on July 21, a 2% drop from the previous rate of 8.28.
The fixed exchange rate between the yuan and the US dollar has been blamed for the soaring trade gap between China and the US. While Thursday’s revaluation was small, it has been estimated that China’s currency is about 40% undervalued, it could help reduce competition from lower-priced Chinese imports since a dollar would buy fewer yuans. A stronger yuan could also increase US exports to China by making US goods cheaper in China.
Both the administration and members of Congress have been calling on China to end its fixed exchange rate policy. Currently, there is legislation before Congress that threatens trade sanctions on China if it failed to allow its currency to float. As a member of the Fair Currency Alliance, the National Cotton Council has sought a revaluation of the yuan.
