China and US signed a "phase one" economic and trade agreement in January. Chapter five of the agreement – entitled Macroeconomic Policies and Exchange Rate Matters and Transparency (to be referred to as "the Exchange Rate Chapter") consists of 13 sections which are divided into four articles: general provisions，exchange rate practices (commitments of each party on exchange rate policies)，transparency and an enforcement (or dispute resolution) mechanism. The exchange rate matter has long been a focus of Sino-US economic and trade relations. Based on consensus and reciprocity，the two parties have for the first time specified this issue in legal texts. This is far from being another "Plaza Accord." Instead it embodies the shared commitments of the two sides，and has created a new model for the coordination of their exchange rate policies.

The renminbi exchange rate has long been of concern to the United States. The two countries established the China-US Strategic and Economic Dialogue during the Obama administration at a time when exchange rate matters were a particularly sensitive topic. The two sides have repeatedly stressed the importance of promoting a market-determined exchange rate regime for the renminbi and enhancing the currency's ability to reflect economic fundamentals.

In late 2018，the leaders of China and the United States met at the G20 summit in Buenos Aires and restarted Sino-US economic and trade negotiations. At that time，the exchange rate reemerged as a focus. A general agreement on this issue was reached relatively quickly.

At a press conference in early 2019，Yi Gang，governor of the People's Bank of China， introduced the consensus reached between China and US on the exchange rate issue. This  mainly included four aspects: mutual respect for the sovereignty of the respective monetary policies of each party，adherence to the rule that the exchange rate shall be determined by the market，an acknowledgement that both parties should not engage in competitive devaluations and should communicate and consult regularly on foreign exchange issues，and ensure the disclosure of data in accordance with international transparency standards. The arbitrary decision by the US in August 2019 to list China as a "currency manipulator" forced China to reopen this matter.

On May 11，2019，after the 11th round of the China-US economic and trade consultations，Vice Premier Liu He gave a media interview in which he drew three "red lines" in terms of Chinese policy. Liu stressed that China will stand firm on matters of principle and that any agreement must be based on equality and mutual benefit as well as address three core Chinese concerns.  "Textual balance" is one of the "three concerns" that were mentioned.

The principle of textual balance has been fully demonstrated in the Exchange Rate Chapter of this agreement. Each section of the four articles refers to "the party" or "the parties." There are no references to unilateral rights or obligations. Based on mutual consensus and common obligations，the whole chapter applies to both parties equally and repeatedly emphasizes mutual respect. This reflects the new big nation relations based on equality and mutual benefit.

No Competitive Devaluation

Refraining from competitive devaluations and targeting exchange rates for competitive purposes are the main themes of the Exchange Rate Chapter，which were also commitments taken by both sides under the multilateral framework of the Group of 20 and the International Monetary Fund.

An exchange rate is a relationship between two currencies. As such，a country's exchange rate has an impact beyond that country's borders. The outbreak of the global financial crisis in 2008 heightened international concerns about currency wars and competitive devaluations. In the years that followed the crisis，the G20 Leaders' Summit，serving as an important platform for international economic policy coordination，has repeatedly stressed that all countries should strengthen coordination on exchange rate matters. The declaration after the 2016 summit in Hangzhou stated: "We reiterate that excess volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. Our relevant authorities will consult closely on exchange markets. We reaffirm our previous exchange rate commitments，including that we will refrain from competitive devaluations and we will not target our exchange rates for competitive purposes." Ever since the 2008 crisis，China has been making every effort to honor this commitment.

The requirement is also one of the general obligations of all IMF members. The IMF was founded in response to the painful lessons of the last century from currency wars，the Great Depression and two world wars. Its purpose was to maintain international exchange rate order. It clearly specifies that member countries should "avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage."

In the 1940s，the international community established a "dual-peg" international currency framework - the Bretton Woods Monetary System，under which currencies were pegged to the dollar，which in turn was linked to gold. After the collapse of the Bretton Woods system in the 1970s，fixed currencies and free floating currencies became two parallel choices. Each state had a right to choose its own exchange rate system. It has become an international consensus that "no exchange rate option can suit all states，or suit all phases of a state." Currently，half of the IMF’s members maintain a managed floating exchange rate with different management modes，while the other half employs fixed or fully floating arrangements.

Since 1994 China has maintained a managed floating exchange rate based on market supply and demand and has been consistently promoting a market-oriented exchange rate formation mechanism. The IMF's Article IV Staff Report on China also clearly shows that China's exchange rate is in line with its economic fundamentals，and is neither significantly overvalued or undervalued.

An Exchange Rate Determined by the Market

The General Provisions of the Exchange Rate Chapter state: "Each Party shall respect the other Party's autonomy in monetary policy. The Parties recognize that flexible exchange rates，where feasible，can serve as a shock absorber. The Parties share the objective of pursuing policies that strengthen underlying economic fundamentals，foster growth and transparency，and avoid unsustainable external imbalances." It also points out in the Exchange Rate Practices article that both parties "shall achieve and maintain a market-determined exchange rate regime; and the Parties shall refrain from competitive devaluations and not target exchange rates for competitive purposes，including through large-scale，persistent，one-sided intervention in exchange markets."

The above consensus is in line with the monetary policy advocated by China that our monetary policy serves mainly to promote high-quality development of the nation's economy and keep financial risks under control.

Strengthening the flexibility of the exchange rate and maintaining a market-determined exchange rate regime are also the direction of China's reforms to the renminbi exchange rate formation mechanism. The renminbi exchange rate weakened beyond 7 to one US dollar in August 2019，even without any adjustments of the quotation system for the currency's central parity rate or expansion of the trading band. This reflected increased flexibility in the  exchange rate and the achievements of greater marketization.

China has made substantial progress on the path towards a market determined exchange rate，refraining from market intervention. A basic equilibrium has been maintained in the balance of payments and the People's Bank of China has basically withdrawn from routine intervention in the market. The US labeling of China as a "currency manipulator" in August 2019 had no basis in fact. It did not meet the IMF's standard for such a determination nor did it meet the three requirements set by the US itself. Moreover，the decision was hurriedly announced after the release of an international exchange rate policy report at the end of May. It violated the accreditation process of the US Treasury Department and resulted in a delayed release of the next semiannual report. As a result，the US was heavily criticized over this issue for commiting an ignoble，politically motivated policy mistake.

Transparency is Our Strength

The third article of the Exchange Rate Chapter is about transparency. It says: "The Parties shall continue to disclose publicly the relevant data，including: foreign exchange reserves，forward positions，balance of payments and exports and imports，within the time frames. They shall consent to the public disclosure of each IMF Article IV Staff Report on the country of the Party and continue to confirm the Party's participation in the IMF COFER (Currency Composition of Official Foreign Exchange Reserves) database."

Transparency requirements do not create any additional burden for China because transparency is our strength. With China's agreement，the IMF has already started to  disclose on a regular basis the IMF Article IV Staff Report on China，which provides an overall assessment of China's economic and macroeconomic policies. Additionally，in order to further improve the transparency，reliability and comparability of our macroeconomic statistical data and promote the renminbi for inclusion in the Special Drawing Rights currency basket，China has been using the IMF Special Data Dissemination Standards since 2014. In order to normalize the disclosure of our macroeconomic and exchange rate data it has been submitting data to the IMF COFER database.   

Data required to be published under this agreement have already been published. Some of the data are published ahead of the stipulated time in this agreement. For instance，the preliminary data of our quarterly balance of payments is published within 60 days after the end of each quarter，and the formal data is published within 90 days. Data on exports and imports of goods and services is disclosed monthly，and foreign exchange reserve data is released around one week after the end of each month. In 2019，China also started to publicly disclose the composition of its foreign exchange reserves and return on investments (data for the past decade) to the IMF. 

Market Communication and Dispute Resolution Mechanism

Article two of the Exchange Rate Chapter talks about exchange rate practices. It says，"The Parties will communicate regularly and consult on foreign exchange markets，activities，and policies." It specifically states that the parties will consult with each other regarding the IMF’s assessment of the exchange rate of each party. The fourth article then specifies the dispute resolution mechanism，saying: "Issues related to exchange rates shall be referred under the Bilateral Evaluation and Dispute Resolution Arrangement established by the People's Bank of China and the US Treasury." The IMF will be requested to assist in the resolution within the remits of its mandate and responsibilities if the parties fail to arrive at a mutually satisfactory agreement.

These two articles provide a clear，depoliticized，and effective way for managing and resolving exchange rate-related disputes from the prior and post-event perspectives. This not only helps clarify misunderstandings and avoid the escalation of conflicts，but also curbs unilateral behavior，making use of the IMF’s authority and neutral position.

According to international law，only the IMF has the right to rule on exchange rate manipulation. Shortly after the US accused China of being a "currency manipulator," the IMF Article IV Staff Report on China released on August 9 absolved China of this allegation though it encouraged China to promote a more flexible exchange rate regime to cope with new changes in the external environment.

The US withdrew its accusation under pressure from China，which made a strong argument on just grounds，and amid criticism from the international community. This enabled the implementation of the exchange rate agreement between China and the US. It was a classic case of resolving disputes via negotiation.

Renminbi Exchange Rate Policy Developing Trend

China and the US reached a consensus on the exchange rate issue in the "phase one" economic and trade agreement. This agreement is helpful to China's effort to deepen the reform on exchange rate marketization.

As stressed during the work conference of the People's Bank of China，we should continue to enable the market to play a decisive role in exchange rate formation. The public perception of renminbi exchange rate reform mainly refers to the optimization of a quotation regime for the renminbi central parity rate and the expansion of the currency's permitted trading range. These are very important parts of the marketization process. Whereas reform is not always vigorous，it occurs naturally with the market continuing to play its role in the process.

After the renminbi exchange rate weakened beyond 7 to one US dollar，the foreign exchange market ushered in a period of rapid development with increased marketization and enhanced exchange rate flexibility. The market now has more participants with several additional securities institutions being authorized to settle and sell foreign exchange. It is now more convenient for foreign institutional investors to conduct foreign exchange hedging on the interbank bond market，making the market more welcoming to the outside world. Additionally，the weighting of the US dollar in the currency basket has been reduced，a move that has further optimized the quotation regime of the renminbi central parity rate.

Foreign exchange reform must accompany other reforms to achieve a sound result. For example，in order to fully enjoy the benefits of the floating exchange rate，we should build a modern central bank system，improve the money supply delivery mechanism，and strengthen  benchmark interest rates as well as the market-oriented interest rate system overall. To better absorb shocks from exchange rate fluctuations，we should steadily and in an orderly manner strengthen the prevention of major financial risks to reduce financial vulnerability and avoid systemic financial risks. We should also improve the financial management of enterprises and encourage them to manage financial risks to better adapt to the new normal of two-way fluctuations in the renminbi exchange rate.

With a foreign exchange rate determined by the market，the renminbi's value would mostly depend on economic fundamentals，while the renminbi exchange rate would possibly fluctuate depending on market sentiment. For instance，positive Sino-US relations would boost market confidence，which in turn should push the renminbi to appreciate. Negative relations would depress market sentiment and result in the depreciation of the renminbi. These are all normal reflections of a market-oriented exchange rate. They have nothing to do with exchange rate manipulation or competitive devaluation.

According to the Sino-US agreement，the US should respect China's autonomy in setting monetary policy. In other words，it should accept the fact that the renminbi exchange rate will float freely under the influence of the market. Of course，a renewed depreciation of the renminbi would very likely lead to renewed attention from the US. As stipulated in the agreement，the two parties should then refer to the Bilateral Evaluation and Dispute Resolution Arrangement or request the IMF to assist in the resolution in the event of a dispute (unless one of the parties withdraws from the arrangement).

Uncertainty is the one certainty we can depend on in the future. We still need to develop relevant countermeasures to pro-cyclical developments，implement necessary macro-prudential management and maintain a stable renminbi exchange rate at a reasonably balanced level.

The author is Dong Fureng Chair Professor and PhD Supervisor of the Department of Economics of Wuhan University