Since early 1997 the Chinese Yuan had been fixed against the US Dollar to provide a fixed and stable currency to support China’s rapid expansion and economic growth. China saw consistent growth, 10% GDP, during this time and was projected to continue for many years to come. Being pegged to the US Dollar, the US found that it was struggling to compete with China in exporting goods, as every time the US Dollar fell, the Yuan would do the same. It was this combination of a strong economy and pegged currency, which resulted in political pressure to revalue the Yuan and transition to a floating exchange rate.
China announced on July 25, 2005 that they would be moving away from a dollar-peg to a managed float. The Yuan’s value would now be influenced by currencies other than the US Dollar. This immediate change would result in a 2.1% revaluation, from Yuan8.28/$ to Yuan8.11/$. While much lower than the 10%-20% devaluation the US was hoping for, the larger implication was the .3% daily accepted deviation to allow the Chinese Yuan to more quickly revalue against other currencies. This transition may have seemed gradual, but created numerous implications across Asia.
Given the consistent growth and expansion of the Chinese economy, numerous countries in the Asian area felt the implications of the change. Several countries began to announce their move to a managed-float exchange rate. Chinese companies and multinationals with operations in China were not looking forward to the change as it would result in increased cost of goods sold, reduced profitability when goods were sold in US Dollar or Euro markets, and other negative outcomes. Outside of China many companies welcomed this revaluation, as it would result in increase purchasing power for Chinese customers and increased costs for Chinese competitors. With the exchange rate decision out of the way, the new issue was: how would this affect the Chinese and global economy?