Will China Join the Currency Wars?

For years we have heard the Chinese currency is undervalued relative to the U.S. dollar and should appreciate. This is no longer true

A trader packs goods near a currency exchange shop in Hong Kong, on April 10, 2015. AP Photo/Kin Cheung

For years we have heard the Chinese currency is undervalued relative to the U.S. dollar and should appreciate. This is no longer true and China might actually have to devalue.

China manages its exchange rate. It is currently pegged to the U.S. dollar at a rate of roughly 6.20 yuan per dollar. Every time the exchange rate fluctuates too much, the central bank of China intervenes in the markets to bring the rate back to where it wants it to be.

Managing the exchange rate this way has helped China to compete in global export markets and accumulate trillions of dollars worth of foreign exchange reserves. Along with China’s growth, the PBOC has actually also allowed the dollar to drop by 25 percent over the past 10 years, giving up some of this artificial competitive advantage.

China's real exchange rate … is 15 to 20 percent overvalued compared with 2010, the last time exports grew like topsy.

— Charles Dumas, Lombard Street Research