Source: St. Louis Federal Reserve Branch.
The exchange rate between the Yuan and the US dollar remains one of the most controversial monetary and trade issues in the global economy. China has actively used monetary policy as a tool to promote its export-oriented growth strategy through the debasement of its currency, the Yuan. In the 1990s, the Yuan was systematically debased from roughly 3.7 Yuan per USD to 8.3 and left at that level for more than a decade. These made Chinese goods cheap in American dollars, and exports increased significantly. The price paid for this export subsidy is substantial inflation within the Chinese economy as it confers higher prices for imported commodities such as food, minerals, and energy.
In 2005 facing pressures from the American government and rising commodities prices, such as petroleum, the Chinese government gradually revaluated its currency and introduced a managed floating exchange rate. By 2008 the exchange rate stabilized at around 6.8 Yuan per USD. Because of intense competition in global markets and between Chinese manufacturers, the profit margin for several export goods is very low (less than 5%), implying that an additional reevaluation of the Yuan has significant negative impacts on the competitiveness of the Chinese export-oriented economy. By 2013, the exchange rate reached 6.0 Yuan per USD, but a reverse trend began as the Chinese economy was losing competitiveness and global demand slowed down. It can thus be expected the Chinese authorities would be highly reluctant to further revalue the Yuan to levels seen before the 1990s.