Two millennia ago, on a crisp winter evening, thousands flocked to Chang’an’s luminous streets, jostling between carriages and merchant stands to glimpse the annual lantern festival.1 Han dynasty China was already astoundingly international2 — an outlook the country has regained in recent decades. Following China’s initiation of the open door and reform policies (gaige kaifang) in 1978 and its accession to the World Trade Organization (WTO) in 2001, China and the global economy have become intertwined “in ways that profoundly changed both.”3
Growth engenders controversy. As China’s international influence swells, countries affected by its actions have grown increasingly critical, especially of its exchange rate policy.4 While the word “renminbi” (RMB) was literally Chinese to most Americans before 2003,5 the United States has since led calls for China to adjust its exchange rate policy,6 claiming that the value of the RMB contributes to the loss of American jobs,7 the current account imbalance, and the ballooning federal deficit.8 The U.S. Department of the Treasury has alleged that “China is a [c]urrency [m]anipulator,”9 while the media has featured allegations that China is weaponizing the yuan.10 Apart from the fact that this argument relies on controversial economics and an arguably simplified narrative,11 its suggestive framing elevates established players onto a moral high ground — and thus helps justify preventing developing countries from independently pursuing their national interests.12
Focusing on interactions between the RMB and the U.S. dollar (USD), this Note applies an amoral framework to the exchange rate debate, arguing that there is no morality to a country’s exchange rate policy and that all countries are — and should be recognized as — driven predominantly by their domestic interests in determining exchange rates. In the historical and legal fields, scholars have long emphasized the power imbalances in the Sino-U.S. relationship, highlighting the self-serving role of the dominant, Western-driven narrative.13 Applied to a political-economy context, the RMB-USD case is a prime example of how the developed world, with the United States at the helm, infuses economic policymaking with a moral dichotomy, thereby allowing it to construct rules to its own advantage at the exclusion of emerging economies.
This Note proceeds as follows. Part I examines the Global North-South opposition in international finance and the moral underpinnings of arguments directed against China’s exchange rate policies. After introducing the concerns that motivate an exchange rate regime, Part II summarizes the current monetary structure through the evolution of the Bretton Woods system, the lack of workable international standards, the resulting dominance of powerful states, and the prevailing importance of domestic interests in shaping international finance. Part III elaborates on China’s exchange rate regime and argues that, despite external pressures, China’s move toward greater exchange rate flexibility is driven largely by long-term domestic interests. Part IV concludes.
I. An Artificial Moral Opposition
With historical vestiges of colonialism allowing wealthy nations to enjoy disproportionate influence in fashioning the rules and language of international finance,14 the developing world is frequently excluded from international policymaking and thus from generating discourse favorable to its position.15 Designed under a colonialist mindset,16 institutions such as the International Monetary Fund (IMF)17 and the World Bank “remain in key aspects colonial in character.”18 Within these institutions, developing countries have less of a say in both leadership and voting: by tacit agreement, leadership has long been selected from Europe or the United States, while the average person in the Global North is represented by eight times the number of votes as the average person in the Global South.19
Discourse premised on morality obscures power struggles.20 Despite China’s rich and notable history, the power imbalances under which it has operated in recent centuries21 have led external discourse to portray the country as an Other perennially “in transition”: savage and half-formed.22 In order to gain admission into the WTO, “China had to agree to alter its legal institutions to conform to North Atlantic standards.”23 China’s WTO “accession protocol” was “filled with unprecedented ad hoc directives for the reorganization of [its] economic and legal systems” that “exceeded both quantitatively and qualitatively what had been demanded of any other member of the WTO.”24
On the other hand, justified by a “hegemonic self-righteousness,”25 “the United States sees the world as an extended playing field for its domestic political economy,”26 frequently portraying other countries as morally questionable. More than “prevent[ing] the self-righteous from seeing that what they consider morally self-evident may be informed by self-interest,”27 this perspective is especially consequential when interacting with a country that Western discourse traditionally portrays as “lawless” and, by extension, morally inferior.28 The United States’s extra-territorial jurisdiction in China in the twentieth century is particularly instructive of this difference, as this extraterritoriality served both to introduce China into an existing global order and to prevent its full ascension into international society.29 The curious United States Court for China30 — a court largely ignored in contemporary scholarship but one that possessed breathtaking discretion in fashioning extraterritorial law31
Id. at 174. — presided over Americans exempt from Chinese law,32 while The Chinese Exclusion Case33 barred Chinese citizens from even entering the United States.34
Within such a tilted framework, the exchange rate complaints that the United States levels toward China typically contain a moral undertone, employing language such as “cheating,”35 “manipulate,”36 and “unfair”37 to portray China as a conscious bad actor. Indeed, “currency manipulation” — rather than the more neutral “currency management” — is a concept that relies on a particular type of power discourse, with the scale of justice tipping invariably toward the hegemon. In the 1970s, Japan became an “early victim of currency warfare,” with the United States threatening to restrict Japanese imports unless the yen appreciated.38 Thereafter, a rising yen led to “massive bubbles in the stock and property markets,” which burst in 1991, proving catastrophic for the Japanese economy.39 Over the last several decades, the United States has similarly accused other booming East Asian economies of deliberately undervaluing their currencies,40 taking a moral stance to pressure them into bilateral negotiations regarding market liberalization.41
While America’s structural power has frequently allowed it to get its way in international finance, it is not the only country acting for the welfare of its constituents — nor should it be.42 Because states are “vehicles of power” that “operate in the interests of the particular internal power structures of their societies,” instead of “moral agent[s]” serving altruistic functions,43 it is only natural that a country’s government would prioritize domestic interests in establishing monetary policy. In macroeconomic policymaking, both China and the United States prioritize domestic interests, rather than external influences, in fashioning exchange rate and current account policies.
II. Exchange Rates, Current Accounts, and Bretton Woods
This Part provides context for the RMB-USD exchange rate inter-action by examining the international financial framework and emphasizing U.S. structural power both before and after the Bretton Woods monetary system. With the creation of the IMF in 1944, Bretton Woods created a par value system that attempted to stabilize exchange rates among member countries.44 After the original Bretton Woods collapsed in 1973, there have been no binding international standards governing exchange rate regimes, with exchange rate interactions operating more through domestic institutions than through the international arena.45
A. Exchange Rates
Exchange rates involve perennial coordination.46 Because exchange rates are relative by definition, when one currency is undervalued, other currencies must necessarily be overvalued.47 Exchange rate policy forms a part of monetary policy,48 which broadly refers to actions that a country’s central bank takes to “influence the availability and cost of money and credit to help promote national economic goals.”49 There are two basic types of exchange rate regimes, fixed and floating,50 with various degrees of flexibility in between.51 Industrialized countries generally have floating currencies, while most developing countries maintain pegged or managed exchange rate regimes.52 The USD, as the unofficial global reserve currency, serves as the peg in fixed exchange rates in many emerging economies.53
Managing the exchange rate involves a constant balancing of domestic and international interests. In a floating regime, monetary authorities can intervene to stabilize the currency, typically with an eye to fulfilling national monetary objectives, such as controlling inflation.54 Maintaining the peg in a fixed exchange rate system, on the other hand, restricts the monetary authorities’ ability to conduct domestic monetary policy55 and risks diminishing domestic price stability in favor of exchange rate stability.56
Many exchange rate regimes involve some management — or “manipulation” — that caters to national priorities.57 If, for instance, the U.S. government wants to raise the value of the dollar, it buys dollars and sells its foreign exchange holdings, and vice versa.58 Apart from direct intervention, the Federal Reserve (Fed) controls the dollar exchange rate through the federal funds rate, a figure that is heavily influenced by mandates to achieve domestic macroeconomic stability.59 U.S. interventions in the foreign exchange market have always been fueled by the goal of ensuring dollar primacy.60 When the Federal Open Market Committee (FOMC), the Fed’s policymaking body, promulgated a series of guidelines to undertake foreign exchange operations in 1962, its basic purpose was to, among other things, “safeguard the value of the dollar.”61 As long as these operations “did not interfere with the domestic objectives of monetary policy” — and did not otherwise concern the Fed or Congress — these interventions have always received the backing of “a clear majority of FOMC members.”62 More recently, in response to the 2008 financial crisis and the COVID-19 pandemic, the Fed engaged in successive rounds of quantitative easing, injecting enormous quantities of money into the economy,63 which can have the effect of weakening the dollar.64
A country that does not use the dollar as legal tender employs similar measures to influence its exchange rate and responds to analogous domestic concerns. China’s monetary authorities, for instance, typically rely on monetary measures and capital controls “for maintaining the RMB exchange rate within [a] set target.”65 The People’s Bank of China (PBC) can issue RMB or purchase foreign currency to affect the level of foreign reserves, or it can use capital controls to adjust the value of the RMB.66 China’s “contemporary legal regime” of the RMB exchange rate “is designed, as it has been since the beginning of the reform era in 1979, to serve China’s overall economic development”67 by, in part, limiting inflation while providing adequate stimulus.68
B. Demise of Bretton Woods
The rise and demise of the Bretton Woods monetary regime69 illustrate both the triumph of short-term domestic interests over ideals of international cooperation70 and the singular position of the United States. Since the regime’s official abandonment in 1973, there has been no unifying international framework guarding exchange rates,71 and inter-national monetary entities have been heavily influenced by the United States.72 As international financial markets “exist under the authority and by permission of the state,” they are “conducted on whatever terms the state may choose to dictate, or allow.”73 Thus, there is nothing inherently moral about an international financial architecture, as policies and standards result from a combination of power dynamics, compromises between states and coalitions, and historical circumstances.
While the 1944 Bretton Woods Conference that created a par value system centered around the dollar was a “major landmark[] in inter-national cooperation,”74 from its founding, Bretton Woods traced U.S. dominance in international finance. The presumption of dollar stability in the IMF Articles of Agreement adopted at the conference allowed the United States to enjoy uniquely favorable treatment.75 In the original agreement, if exchange rates between the dollar and another member’s currency did not fall within the permissible margins, that member, and not the United States, would be seen to violate its obligations.76
Three decades later, the loss of credibility of U.S. monetary policy, lack of confidence in dollar stability, and fear of importing U.S. inflation played key roles in the collapse of Bretton Woods.77 In 1969, the Nixon Administration began to “adopt[] a practice of ‘benign neglect’ about the growing balance-of-payments deficit and the United States’ commitments under Bretton Woods,”78 which meant that “the balance of payments deficit and the dollar overhang [would] grow unchecked.”79 The federal government’s focus on domestic growth and employment, coupled with the emergence of inflation, “flooded foreign economies with dollar reserves, put[ting] upward pressures on their currencies and price levels.”80 In closing the gold window in 1971,81 President Nixon attempted to safeguard the dollar’s position in the international economy and, should that fail, “to gain control over the trade deficit and minimize associated job losses in the U.S. economy.”82
By 1970, the markets began to “view[] exchange-market disorder as a dollar crisis,”83 and “West European governments [became] increasingly unwilling to finance growing U.S. deficits.”84 In late 1978, “[w]ith no sign that the United States was going to reduce its growing external deficit and curb domestic inflation, foreigners began to lose confidence in the dollar.”85 Foreign governments and investors hastened to institute a number of policies in anticipation of a weakening dollar, as Saudi Arabia sold its dollar reserves, Western Europe created the European Monetary System, and investors fled from the dollar.86
U.S. transgression of the par value system resulted in no legal sanctions. After the United States retreated from dollar convertibility, it “did not adopt other ‘appropriate measures’ to ensure that exchange rates between the dollar and other currencies would respect the permitted margins above and below parities,” as required by the Articles.87 While the Secretary of the Treasury claimed that the refusal to take such measures placed the adjustment burden on other IMF members, “[t]his attitude was inconsistent with the basic principle of the par value system that each member was legally responsible for observing the obligations of the Articles in relation to its own currency.”88 The dollar’s hegemonic position “did not release the United States from this principle or from accountability.”89
After Bretton Woods collapsed, multilateral negotiations attempted to establish another framework, all the while operating under U.S. dominance.90 But, as the United States became cognizant of how it was “the main beneficiary” of Bretton Woods’s collapse, it steadfastly “resisted attempts to construct a new formal international financial regime.”91 The amended IMF Articles of Agreement failed to propose workable legal standards, with obligations “formulated as law of so soft a character as to defy objective judgment.”92 While the oft-cited Article IV, section 1 stipulates that countries should “avoid manipulating exchange rates . . . to gain an unfair competitive advantage over other members,”93 the precise meaning of “manipulating” was never clearly defined.94 Indeed, for the United States, the “main virtue” of that section was its elusiveness, providing “as much freedom as possible for the national determination of domestic policies.”95 Thus, emphasis on national determination served at the outset to benefit the hegemonic actor, instead of countries at the margins of international financial governance.
C. Post–Bretton Woods: The United States’s Structural Power
The dissolution of Bretton Woods provided the United States with vast structural power to promote domestic objectives in the global financial architecture.96 Post–Bretton Woods, unregulated global capital markets loosened constraints on U.S. monetary policy while allowing inflows of foreign capital to sustain U.S. standards of living.97 U.S. policy-makers were cognizant that maintaining “the continued openness of international capital markets” meant they could continue to employ the “dollar weapon.”98 This strategy both encouraged foreigners to bear the burden of the United States’s large current account deficits99 and allowed the United States to “preserve its policy autonomy.”100
America “has lived beyond its means” for decades, “exploit[ing] the borrowing capacity afforded by the dollar’s worldwide acceptability to postpone payments adjustments indefinitely.”101 The dollar’s dominant-currency status has allowed the United States to borrow cheaply and promote power abroad.102 The Pentagon “spend[s] nearly as much as the rest of the world combined to project American influence around the world,”103 and the dollar’s appeal provides the issuer with immense “latitude to pursue foreign political objectives.”104 Moreover, as the dominant player in international financial organizations,105 the United States is “at the pinnacle of a network of institutional connections that it has done much to constitute and from which it is the primary beneficiary.”106 Created under American leadership, institutions such as the IMF, the World Bank, and the WTO “sought to reconstruct the world . . . in the image of the United States,”107 pressuring other states to abdicate their own autonomy while creating questionable legal precedents.108
The U.S. Congress has also empowered the executive branch to wield this structural power by regularly monitoring other countries’ exchange rates. The Omnibus Trade and Competitiveness Act of 1988109 and the Trade Facilitation and Trade Enforcement Act of 2015110 direct the U.S. Treasury to evaluate major U.S. trading partners every six months.111 Pursuant to these Acts, the Treasury submits semiannual reports to Congress.112 If a country shows indicia of possible currency manipulation — as demonstrated by “a significant bilateral trade surplus with the United States,”113 “a material current account surplus,”114 and “persistent one-sided intervention in the foreign exchange market”115 — Congress directs the Treasury to “commence enhanced bilateral engagement with [that] country.”116
Despite U.S. preeminence, the current ad hoc monetary arrangement means that countries enjoy vast leeway in formulating exchange rate policies and are free to prioritize domestic considerations. Under international law, currency regulations and exchange controls “fall within the domestic jurisdiction of the State concerned.”117 While a currency’s value may affect other countries, this “does not negate the sovereignty of a nation to adopt its own exchange rate policies.”118
III. RMB Exchange Rate: Debates and Determinants
The RMB-USD peg in 1994 ended the previous multi–exchange rate regime,119 and in July 2005, China moved to a managed peg system to allow gradual RMB appreciation.120 After halting appreciation during the 2008 financial crisis, the RMB continued its upward trend in June 2010.121 With an eye toward maintaining financial stability122 and balancing various domestic macroeconomic interests, China has gradually made its exchange rate system more flexible, emphasizing export expansion rather than import substitution.123
The country’s “policy of gradual and limited liberalization of foreign exchange controls” has proved “a resounding success,”124 helping to sustain growth in exports and inward foreign direct investment while avoiding significant foreign exchange crises.125 Ultimately, “the world has to adapt to China’s growth and its dramatic transformation, welcoming the reduction of Chinese poverty and enjoying the improved terms of trade that incidentally China has . . . bestowed on many of its trading partners.”126 While China’s policies undoubtedly pose risks, “these are China’s risks to accept and manage.”127
A. Determining the RMB Exchange Rate
Despite foreign pressure, the RMB exchange rate derives largely from an ongoing and complicated set of domestic institutional debates.128 China’s exchange rate policy primarily strives to maintain employment,129 protect its burgeoning financial system, and remain receptive to public opinion.130 “[W]hatever other nations . . . may like to think of their own capacity to pressure China into compliance,” China makes exchange rate decisions based on policymakers’ perceptions of national self-interest, giving rise to continuous, “dynamic interplay between national priorities and the interests of institutional and noninstitutional actors.”131
The 1996 Forex Regulations lay the foundations of China’s foreign exchange regime, serving as a basis for further reforms.132 Three government bodies — the PBC, the State Administration of Foreign Exchange (SAFE), and the State Council133 — play the most prominent roles in designing and implementing the foreign exchange regime,134 with the PBC largely leading the process. The PBC, as the “formulator of monetary policy and chief regulator of the financial sector,” oversees the “foreign exchange business conducted by financial institutions, including issuing and monitoring permits to conduct forex business, regulation of forex asset quality and risk management, [and] establishing working balances for members of the foreign exchange interbank market.”135 It also intervenes when necessary in the foreign exchange market and manages foreign currency reserves.136 SAFE, for its part, contributes to overall policymaking by conducting research and making policy suggestions to the PBC, maintaining “significant leeway in interpreting and executing policies approved” by the central bank.137
In practice, major monetary policy decisions arise out of continuous conversations between government bodies138 and policymakers. They balance various factors in designing exchange rate policies while remaining highly responsive to societal preferences and institutional expertise.139 Nongovernmental organizations, private businesses, and think tanks regularly provide input regarding economic decisions.140 Apart from the three main institutions, policymakers also receive suggestions from other governmental organs, including the Ministry of Commerce (MOFCOM) and the National Development and Reform Commission (NDRC).141 Institutional positions frequently diverge, such as when the PBC supported “a more flexible exchange rate for greater monetary autonomy,” while MOFCOM argued that “exchange rate stability was crucial for China’s growth and employment.”142 The PBC also clashed with the NDRC over monetary policies in 2003, leading the latter to “concede considerable authority to the PBC” regarding macroeconomic management.143
Over time, the PBC has been gaining influence in exchange rate deliberations.144 Prior to the 2005 reforms, the PBC held staff seminars on macroeconomic management, invited leading global economists to present their views, and sent officials abroad to observe other central bank practices.145 In 2004, the PBC organized a symposium on the exchange rate, consisting of IMF officials and prominent American economists, where it both heeded international concerns and emphasized its own autonomy.146 After the PBC widened the RMB’s daily trading band with the dollar in 2012, the IMF noted that the move “underline[d] China’s commitment to rebalance its economy toward domestic consumption and allow market forces to play a greater role in determining the level of exchange rates.”147 As the PBC garners independence and political heft, it will likely continue to accelerate capital account liberalization and exchange rate reform.148
B. The RMB’s Growing Pains
As the United States seeks to influence China’s exchange rate policymaking through international organizations and its own governmental organs,149 moral arguments undergird the narrative. In international forums, the United States has accused China of manipulating its currency to gain an unfair advantage in international trade.150 Since the turn of the twenty-first century, Congress has advocated for sharp appreciation of the RMB.151 In the face of growing U.S. deficits, then–Treasury Secretary Henry Paulson stated bluntly in 2007 that China’s monetary policy was harming the U.S. economy.152 In 2019, the Treasury named China a currency manipulator, even though only one of the criteria of the 2015 Act had been met three months prior.153 The Treasury removed the label less than six months later, suggesting that the shaming tool served as leverage for trade negotiations instead of a reaction to underlying economic concerns.154
U.S. attention to the RMB exchange rate serves as a crude proxy for concern over China’s current account surplus155 and the U.S. deficit. By influencing global prices, exchange rates exert a significant influence on the current account.156 Members of Congress routinely contend that China’s currency policy makes Chinese exports less expensive and Chinese imports more expensive than would be the case if the RMB were more flexible.157 This argument reasons that RMB undervaluation has given rise to the decline in American manufacturing employment and to the large U.S. trade deficits with China.158
However, without an accepted methodology to determine “equilibrium” exchange rates159 and with China remaining a developing country undergoing substantial transformations, it is “next to impossible” to determine the RMB’s equilibrium exchange rate.160 Among those who agree that the RMB is “undervalued and insufficiently flexible,” there is little consensus “on the size of the undervaluation or on how the existing misalignment should be corrected.”161 In 2009, for example, four separate studies “concluded that the RMB was undervalued against the dollar by rates of 12%, 25%, 40%, and 50%, respectively.”162
While the real exchange rate of the RMB was “undoubtedly low” during the 1980s and 1990s, “there is little evidence that this was due to a deliberate policy to keep the exchange rate undervalued.”163 Economists note that since “[p]oor-country currencies are normally undervalued compared to their purchasing power parity values[,] . . . part of the undervaluation ascribed to China’s currency results from market forces that make non-traded goods relatively cheap in poor countries, rather than from deliberate currency manipulation.”164
Moreover, non-China factors are greater contributors to American job losses than China’s currency policy,165 and a country’s exchange rate regime is not indicative of the state of its current account.166 Given China’s high savings rate and the United States’s low one, it is unsurprising for the former to run a surplus while the latter runs a deficit.167 The United States has maintained a current account deficit since 1982,168 and it became the world’s largest debtor country in 1985.169 Global imbalances resulted partly from government and private-sector spending, and these imbalances led to a negative savings rate before the 2008 crisis.170 The U.S. current account deficit widened to $822 billion in 2021.171 China, on the other hand, typically runs a current account surplus. The surplus reached 11.1% of gross domestic product (GDP) by the end of 2006,172 though it has declined in recent years and represented only 0.06% of GDP in 2018.173
The dollar’s experience, with other currencies as well as the RMB, confirms that RMB appreciation alone will resolve neither global nor bilateral imbalances.174 “The United States ran a current account deficit before China’s integration in the world economy,”175 and it “has had significant trade deficits with China since 1975,” two decades before the introduction of the fixed exchange rate regime.176 From 1985 to 1988, when the average Yen-USD exchange rate fell from 239 to 128, “the U.S. global current account deficit only fell from 2.1 percent to 1.7 percent of GDP.”177 When the dollar depreciated by 35% against the euro between 2000 and 2006, the U.S. bilateral deficit with the Eurozone doubled.178 When the RMB appreciated by around 21.4% against the dollar between 2005 and 2008, the United States’s bilateral deficit with China increased by over 30%.179
The Congressional Research Service concedes that the current account imbalance will “persist as long as underlying macroeconomic imbalances persist.”180 In other words, while “China’s use of an exchange rate peg and capital controls may have contributed to its high saving rate, . . . it is unlikely that movement to a floating exchange rate would eliminate the large disparity between U.S. and Chinese saving rates.”181 As a “fundamental cause of a trade deficit is an imbalance between a country’s savings and investment rates,”182 America’s own savings and investment decisions — at both the government183 and household level184 — drive the state of the trade balance.185 Thus, even if the RMB rose in value and flexibility, the United States would likely continue to be a net debtor and China a net creditor.186
Further, it is not at all clear that the United States would reap a net benefit from an appreciated RMB.187 Apart from increasing interest rates, appreciation would only benefit certain sectors — export firms in the United States and their workers — while negatively affecting others — consumers and firms using Chinese-made components.188 Absent “an increase in American savings, [RMB] appreciation will only switch some [U.S.] import demand away from China to . . . other countries.”189
C. China’s Reforms
China’s “living miracle of economic development” is “based primarily on a steadfast commitment to market-based reforms.”190 Among the plethora of ongoing reforms, two are particularly relevant here: promoting domestic consumption and instituting a more flexible exchange rate policy. While conforming ostensibly to foreign interests, policymakers are largely motivated by the potential of these policies to serve long-term domestic interests, rather than by a desire to be viewed by external discourse as a “moral” actor. More flexible RMB policies align with China’s domestic goals and threaten American structural power based on the greenback, particularly as the United States shifts its concern away from budget deficits191 and China pushes for RMB internationalization.
China is taking “dead aim at the imperatives of a consumer-led growth dynamic” as part of its focus on domestic interests.192 In the Twelfth Five-Year Program, covering 2010 to 2015, the government designated domestic consumption — which “itself was to be more equitable” — as “the primary driver of economic growth.”193 Under a “dual circulation” strategy, the government aims for consumer spending to gain more prominence in the future.194 In 2021, the government prepared “a series of policies to boost private consumption in big cities like Shanghai and Beijing, in rural areas[,] and in the catering sector.”195
At the same time, China continues to increase RMB flexibility, a key contributor to putting its “financial system on a more market-based footing.”196 The PBC has emphasized both the stability of the RMB in the short term and the trend toward market-determination in the long run.197 The RMB is now largely where it should be: the IMF’s External Sector Report in 2015 assessed the RMB to “no longer be undervalued,”198 and the Fund found the RMB in 2017 to be “broadly [in] line with fundamentals and desirable policies.”199 Professor Stephen Roach shares that RMB offshore internationalization, “a more open capital account, and significantly wider currency trading bands leave little doubt that China is committed to establishing a market-based, fully convertible” currency.200
Reforms have successfully reduced the current account imbalance. China’s current account surplus “fell by almost one half in 2011 to $155 billion, well below the 4 percent of GDP level considered a benchmark for a balanced external account.”201 Since 2011, China’s current account surplus has continued to decline, reaching 0.4% of domestic GDP in 2018 and 1.9% in 2020.202 From 2008 to 2018, China’s current account balance “declined remarkably — one of the most amongst G-20 countries,”203 reflecting “a gradual and still ongoing normalization of the domestic saving rate.”204 It might even enter negative territory this year.205
Although China’s exchange rate and broader monetary policies206 have seemingly applied prescriptions urged upon it by foreign actors,207 this alignment stems from Chinese policymakers’ belief that reform serves China’s long-term interests,208 instead of the need to conform to morally laden critiques. Transitioning to a more consumption-led growth dynamic promotes sustainable growth by creating more jobs, improving income distribution, and mitigating environmental damage.209 A more flexible exchange rate is an integral part of this process, and reforms to this end highlight both complex institutional dynamics and a growing consensus that liberalization benefits China’s growth.
Allowing the PBC greater flexibility in setting exchange rates and thus the domestic interest rate would result in a lower rate of investment, “a critical component of the . . . transition to a more consumption-driven growth path.”210 More flexibility also allows authorities to respond to unexpected circumstances211 and the PBC to push for international usage of the RMB.212 Increased RMB flexibility would presumably lead to fuller integration into the global capital and currency markets,213 promoting China’s “international recognition and acceptance as one of the leading economies of the world, a dream shared by most Chinese.”214
Conclusion
With each country acting to promote domestic interests, the exchange rate narrative should be free of moral undertones. Even as structural power premised on historical hegemony currently affords the United States enormous political and economic autonomy, other sovereign states also prioritize domestic considerations in instituting monetary policies. While both China and the United States have much to gain from cooperation in certain areas,215 exchange rates might not be on that list. Situated in the modern monetary nonsystem, state power resides primarily in displaying mighty muscles, not brokering agreements. Whether it be through bilateral negotiations or multinational forums, when empires meet,216 each will ultimately seek to promote and defend its own interests.