(Reuters) - U.S. President Barack Obama has promised to raise the issue of the yuan’s exchange rate when he visits China from November 15-18, putting the spotlight on a major bone of contention which has the potential to shake currency markets and diplomatic ties.
As China’s economy has regained much of its pre-crisis strength, debate over the appropriate exchange rate for the yuan, or renminbi, is simmering again among policymakers and traders.
Paired with voracious debt-financed spending by U.S. consumers, the competitive rate of the yuan has been pinpointed as one of the main causes of the imbalances in trade and investment that ushered in the global financial crisis. Here is a timeline of how China’s currency has developed.
December 1, 1948: First ‘renminbi’(RMB) or “people’s currency” is issued as the People’s Bank of China (PBOC) is founded. It circulates as civil war rages between Mao Zedong’s Communist rebels and the ruling Kuomintang Chinese Nationalist Party.
October 1, 1949: The victorious Mao founds the People’s Republic of China. Yuan established as sole unified legal currency, as communists seek to end the hyperinflation that has plagued China.
March 1, 1955: PBOC issues second RMB series.
1955-1971: Exchange rate set at 2.46 yuan to the dollar until 1971, the year China takes its seat at the United Nations.
1962: Third series of RMB issued.
1960s-1970s: Yuan stable in terms of inflation, as government sets wages and prices in centrally planned economy.
1972-79: RMB gradually revalues to 1.50 yuan to the dollar.
1978: Two years after Mao’s death, Paramount leader Deng Xiaoping, architect of the “socialist market economy” that supersedes the centrally planned economy, begins reforms.
1979: As part of China’s opening up, government begins foreign exchange retention quota system to encourage exports, allowing firms to retain a percentage of foreign exchange claims.
January 1981: First round of yuan devaluation. State Council introduces “internal settlement rate” of 2.80 yuan/dollar. The more realistic exchange rate is based on China’s average export cost per dollar plus a 10 percent margin.
September 1983: State Council decides the PBOC should function solely as central bank, not a commercial bank as well.
January 1, 1985: Internal settlement rate abolished. China sets rate at 2.80 yuan/dollar, ending dual exchange rate system.
1987: Fourth series of RMB issued.
Early 1990s: Exporters suffer increasing losses because of the yuan’s overvaluation.
April 1994: First foreign exchange trading center opens in Shanghai, starting China’s inter-bank foreign exchange market.
— Yuan rate is set around 8.28 yuan per dollar as part of a tightly managed floating exchange rate policy.
December 1, 1996: China allows yuan convertibility on current accounts. It maintains foreign exchange controls on the capital account, particularly outflows, fearing a crisis may spark a stampede out of the yuan.
1997-2005: Government keeps yuan pegged at 8.3 per dollar. Resisting the temptation — and some advice — to devalue in line with its neighbors during 1997-98 Asian Financial Crisis, China provides some stability in the global monetary system.
1999: Fifth series of RMB features Mao Zedong on all notes.
Dec 2001: China joins World Trade Organization.
2003: U.S. Senator Schumer introduces first Congressional bill targeting value of yuan.
2004: Bank of China monopoly on foreign exchange transactions lifted, allowing financial institutions to handle them.
July 21, 2005: PBOC ends the dollar peg; revalues yuan by 2.1 percent to 8.11 per dollar. It says it will pursue a managed floating exchange rate based on market supply and demand with reference to a basket of currencies. The yuan will be allowed to rise or fall 0.3 percent a day against the dollar from a reference rate set every morning by the PBOC.
2006: Two U.S. senators co-sponsor bill to impose high tariffs on Chinese goods if Beijing does not let the yuan rise; reflecting Congress frustration over the U.S.’ billowing trade deficit with China, which hit a record $233 billion in 2006.
2007: The yuan’s daily trading band against the dollar is widened to plus or minus 0.5 percent.
2008: China issues special banknotes for the Beijing Olympics, taking Mao off the front of the currency for the first time to showcase its central Olympic Stadium, the Bird’s Nest.
2009: RMB remains convertible on the current account, but not the capital account. Making the RMB fully convertible remains a distant goal, as China fears its financial system may not be able to handle rapid cross-border movements of money.
Nov 11 - In Singapore, World Bank chief Zoellick calls the dollar’s role as a reserve currency “relatively secure,” but says over the next 10-15 years the renminbi will provide an alternative once it is internationalized.
— On the same day, China sends its clearest signal yet that it is ready to allow yuan appreciation after an 18-month hiatus, saying it will consider major currencies, not just the dollar, in guiding the exchange rate.
Nov 16 - United States and China spar over exchange rates at a meeting of Asia Pacific leaders in Singapore, pointing to tricky talks ahead on Obama’s visit to China to address economic tensions.
2020: State Council target for Shanghai to become international financial hub — a goal experts say cannot be met without internationalizing through full yuan convertibility.
Compiled by Gillian Murdoch; Editing by Kim Coghill