December 2009

Since the initiation of economic reforms and trade liberalization thirty years ago, China has been one of the world’s fastest-growing economies and has emerged as a major economic and trade power. The combination of large trade surpluses, FDI flows, and large-scale purchases of foreign currency (especially dollars) has helped make China the world’s largest holder of foreign exchange reserves at $2.3 trillion. The global economic crisis began to impact China’s economy in late 2008. The Chinese government has sought to boost the economy by implementing a $586 billion economic stimulus package (largely aimed at infrastructure projects), establishing easy money policies to boost banking lending, and providing assistance to various industries. Despite the relatively positive outlook for its economy, China faces a number of difficult challenges that, if not addressed, could undermine its future economic growth and stability. China’s economy and economic policies are of major concern to many U.S. policymakers. This report provides an overview of Chinese economic development since the 1970s and explains major long-term challenges for the Chinese economy.

Some Members of Congress charge that China’s policy of accumulating foreign reserves (especially U.S. dollars) to influence the value of its currency constitutes a form of currency manipulation intended to make its exports cheaper and imports into China more expensive than they would be under free market conditions. They further contend that this policy has caused a surge in the U.S. trade deficit with China in recent years and has been a major factor in the loss of U.S. manufacturing jobs. The current global economic crisis has further complicated the currency issue for both China and the United States. This report summarizes American and Chinese concerns about changes to currency policy and the implications of potential modifications.