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 pressure from the American government and rising commodity prices, including petroleum, the Chinese government gradually revalued its currency and introduced a managed floating exchange rate. By 2008, the exchange rate had stabilized at approximately 6.8 Yuan per USD. Because of intense competition in global markets and among Chinese manufacturers, profit margins for several export goods are very low (less than 5%), implying that an additional revaluation of the Yuan would have significant negative effects on the competitiveness of the Chinese export-oriented economy. By 2013, the exchange rate had reached 6.0 Yuan per USD, but the exchange rate reversed as the Chinese economy lost competitiveness and global demand slowed. It can thus be expected that the Chinese authorities would be highly reluctant to further revalue the Yuan to levels seen before the 1990s.