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The Chinese yuan lost 0.6 percent in the weeks following a July 25 special Politburo meeting on the economy. This marks, at least temporarily, a reversal of the gradual strengthening of the yuan against the dollar that began in July 2005 and saw the currency appreciate some 20 percent. The change in part reflects the recent strengthening of the dollar against other major currencies. But more than that, China’s yuan policy, as a part of its overall economic policies, has been part of the debate raging among the country’s top leadership — one that may have come to a head in July.
The reversal of the yuan, coming after the critical July economic meeting, could mark a shift in the balance of power among the Chinese leadership, with those arguing for maintenance of the high-growth, export-based policies of the past winning out over those calling for slower growth and a shift to building the self-sustaining foundations of a domestic consumption-driven economy.
In some ways, China’s currency policy has acted as a barometer of the economic challenges facing the leadership, and how they have dealt with them. From April 1980, at the dawn of China’s reform and opening, until Jan. 1, 1994, China had a dual-currency system — one set at an official rate for domestic use (that foreigners were not allowed to possess) and another, the Foreign Exchange Certificate (FEC), at a slightly more flexible rate for foreigners. This dual-currency policy gave preferential treatment to foreigners — part of the government’s desire to attract investment and technology — while keeping the domestic rate stable as a way to control inflation and ensure social stability.
But the system led to a thriving black-market exchange, and with the Chinese increasingly traveling abroad and investment flows recovering after the 1989 Tiananmen Square incident, the system was abolished. After a radical revaluation of the new single yuan, the currency gradually strengthened over the succeeding year and a half, as the remaining FECs were withdrawn from circulation, eventually settling at a little over 8.25 to the dollar — a place where it remained pegged until the latest revaluation in July 2005. The pegged currency made China predictable, and meant that when the Asian economic crisis struck South Korea and the rising Southeast Asian tigers, China became the go-to place for cheap exports.
The boom in the Chinese economy, facilitated in part by the decline of its neighbors, saw China take an increasingly important role in the global economy. It also meant that the yuan became significantly undervalued. And as China’s political and military strength grew with its economy, international pressure on Beijing to change the yuan grew apace. But it was not only foreign complaints that led to the changing yuan policy. There were domestic concerns as well. After gaining from the misfortune of their neighbors, the Chinese began to realize that the export-based Asian growth model of the economy was one fraught with risks, and in China it had nearly run its course.
In the mid 1990s, Chinese leaders began to seriously examine the Chinese economy as it became clear that the widening gap between the rich and poor and between the coastal urban areas and the rural inland areas was stirring social unrest. Under then-President Jiang Zemin and Premier Zhu Rongji, China began revising its method of collecting statistics, and the more accurate numbers painted a stark picture of economic and social reality far different from the sugar-coated official reports feeding up the chain from the local levels. China’s age-old problem — balancing the distribution of wealth — was once again at the forefront, as it became apparent that economic growth had primarily benefited the coastal third of the population, leaving the remaining two-thirds behind.
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