Question

how does China maintain its fixed exchange rate policy

Answer 1

Managing the yuan exchange rate to benefit its exports is a cornerstone of China's economic policy. As is the case with most advanced economies, China does not have a floating exchange rate that is determined by market forces. It pegs its currency, the yuan (or renminbi), to the dollar of the United States instead. For more than a decade, beginning in 1994, the yuan was pegged to the greenback at 8.28 to the dollar. "It was only in July 2005 that the yuan was allowed to appreciate by 2.1 percent against the dollar due to pressure from China's main trading partners, and was also converted to a" controlled float "scheme against a basket of major currencies that included the U.S. dollar. The yuan has been allowed to appreciate by about 21 percent to a ratio of 6.83 to the dollar over the next three years. In July 2008, when worldwide demand for Chinese goods plummeted owing to the global financial crisis, China stopped the yuan 's appreciation.

China revived its programme of steadily pushing the yuan up in June 2010 and the currency had cumulatively appreciated by around 12 percent to 6.11 by December 2013.

It is difficult to assess the true worth of the yuan, and while multiple reports over the years indicate a broad variety of undervalued values-from as little as 3% to as high as 50%-the common consensus is that the currency is significantly undervalued. China makes its products more competitive in the global economy by holding the yuan at unfairly low prices. China does this by pegging the yuan to the U.S. dollar at a constant reference rate set by the People's Bank of China (PBOC) and enabling the currency on either side of the reference rate to fluctuate within a fixed band. Because if it were permitted to float freely, the yuan would appreciate dramatically against the greenback, China controls its growth by purchasing dollars and selling yuan. By the fourth quarter of 2013, this steady accumulation of dollars enabled China's foreign exchange reserves to rise to a record $3.82 trillion.