China has been accused of fixing its currency, the renminbi, at an artificially low level for many years. This has given China an unfair advantage in international trade, as it makes its exports cheaper and imports more expensive. However, this policy has also created some structural issues and problems for China's economy, such as:

• Excessive reliance on exports and investment. By keeping its currency undervalued, China has stimulated its export sector and encouraged domestic investment in infrastructure and manufacturing. However, this has also led to a neglect of domestic consumption and services, which are more sustainable sources of growth and employment. China's economy has become unbalanced and vulnerable to external shocks, such as trade wars and pandemics.
• Large accumulation of foreign exchange reserves. To maintain its currency peg, China has had to intervene in the foreign exchange market by buying foreign currencies and selling renminbi. This has resulted in a massive build-up of foreign exchange reserves, which reached over $3 trillion in 2021¹. However, holding such large reserves has opportunity costs, as China could have used the funds for more productive purposes, such as social welfare and environmental protection. Moreover, China faces the risk of capital losses if the value of its reserve assets declines due to exchange rate fluctuations or inflation.
• Financial repression and debt accumulation. To prevent inflation and capital outflows, China has imposed strict controls on interest rates, credit allocation, and capital movements. This has created a system of financial repression, where savers are paid low returns and borrowers are subsidized. This has distorted the allocation of resources and encouraged excessive borrowing and lending, especially by local governments and state-owned enterprises. China's total debt-to-GDP ratio rose from 147% in 2007 to 286% in 2020², raising concerns about financial stability and debt sustainability.

These structural issues and problems have become more evident and acute in recent years, as China's economy has slowed down and faced increasing external and internal challenges. China has recognized the need to reform its currency policy and address its structural imbalances, but the progress has been slow and uneven. China has allowed more flexibility in its exchange rate since 2005, but it still intervenes to prevent excessive appreciation or depreciation. China has also taken some steps to rebalance its economy towards consumption and services, but it still relies heavily on exports and investment for growth. China has also implemented some measures to liberalize its financial system and reduce its debt burden, but it still maintains tight controls on interest rates and capital flows.

To achieve a more balanced, green, and inclusive growth, China needs to accelerate its reforms and allow its currency to reflect market forces. This would help China to diversify its sources of growth, reduce its dependence on foreign reserves, improve its resource allocation, and enhance its financial stability. It would also benefit the global economy, as it would reduce trade imbalances, ease trade tensions, and foster international cooperation. However, such reforms are not easy to implement, as they entail significant costs and risks in the short term, and face political and social resistance. China will need to carefully calibrate the pace and sequencing of its reforms, and communicate its policy intentions clearly and credibly to the public and the markets.

China got away with fixing their currency for a long time - but now it's come back to bite them with structural issues.