managed currency

Case Study Governments often choose to manage their currencies in an effort to gain a cost advantage in international trade. An artificially cheap currency stimulates exports and dampens imports, resulting in a stronger economy, domestic job growth, and an increase in international reserves. On the negative side, price inflation, asset bubbles, and higher interest rates may accompany a rapidly growing economy. Critics of China's economic policy claimed for years that the People's Bank of China maintained a policy of actively managing the yuan so that it was substantially undervalued relative to other major currencies, especially the dollar. The cheap yuan allowed the government to stimulate exports and domestic job growth. This resulted in huge trade surpluses with the United States that reached $177 billion in 2006. The mammoth U.S. trade deficit was accompanied by the loss of jobs and industrial capacity to China. Under pressure from U.S. businesses and government officials, the assistant governor of the Chinese central bank indicated in mid-2007 that the yuan would gradually become more flexible (decline in value) as the exchange rate was “managed in a rational and balanced manner."