What was the exchange rate policy adopted by China until July 2005? Explain how it worked. Draw a graph to illustrate your answer.

In 2007, the U.S. trade deficit with China hit $256.3 billion, the largest deficit ever recorded with a single country. Chinese currency, the yuan, has risen in value by 18.4 percent against the U.S. dollar since the Chinese government loosened its currency system in July 2005. However, U.S. manufacturers contend the yuan is still undervalued by about 40 percent, making Chinese goods more competitive in this country and U.S. goods more expensive in China. China buys U.S. dollar-denominated securities to maintain the value of the yuan in terms of the U.S. dollar.