China's currency becomes key issue in US trade talks

US officials have said any trade deal with China will include a provision to prevent manipulation of the exchange rate to help exporters but Beijing's currency regime reflects a complex reality.

US President Donald Trump, who has accused the Asian giant of artificially undervaluing its currency for competitive purposes, last week said "we have a deal" with China on the currency.

And White House economic adviser Larry Kudlow on Thursday said the draft documents would prohibit currency manipulation and oblige authorities in Beijing "to report any interventions in the market."

But at the center of the issue is a paradox: China does not necessarily want a weak currency, and the downward pressure on the yuan is in large part caused by US economic conditions, like rising interest rates.

The yuan or renminbi (RMB) is not freely convertible and the government limits its movement against the US dollar to a two percent range on either side of a central parity rate which the People's Bank of China sets each day to reflect market trends.

That managed float system limits volatility: the currency has remained confined in the last five years between 6.2 and 6.8 yuan to the dollar, a historically high level, compared to 8.28 fixed rate in the 2000s.

While the RMB strengthened 6.3 percent in 2017, it depreciated by 5.7 percent last year, falling to its lowest level in a decade, which was enough to spur speculation Beijing was putting its foot on the currency scale again.

But the International Monetary Fund has said the RMB is not undervalued, and in a July report said it was "broadly stable against the basket of currencies ... and broadly in line with fundamentals."