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The Chinese People’s Bank of China has maintained a peg to a basket of currencies, including the US dollar, since 2005. A peg is a value of the currency (the Chines yuan, also referred to as the renminbi) chosen the the central bank (in this case, the Chinese People’s Bank of China). The central bank maintains the peg by buying international currency on the open market. Since 2005, the value of the Yuan has been roughly 8.11 Yuan/U.S. dollar. Today, the value of the Yuan is 7.30 Yuan/U.S. dollar –the U.S. dollar depreciated, while the yuan appreciated.
Why might this happen? According to the NY Times, the Chinese government bowed to international pressures and allowed the yuan to appreciate in order to curb exports to countries such as the
First, and foremost, the People’s Bank of China holds more than $1.2 trillion in foreign exchange reserves – a level that is very costly. The reserve stock is denominated in currencies such as the euro, British pound, South Korean won, Japanese yen, Thai bhat, Russian ruble, Australian dollar, Canadian dollar, and the
In conclusion, there are three important reasons that the People’s Bank of China is forced to allow the yuan to appreciate. They are: an ever-growing stockpile of foreign exchange reserves, inflation, and attempt to gain monetary control - not international pressures.
This is not the end in the appreciation of the yuan. Economic forces will eventually force the yuan to exhibit characteristics closer to a floating currency (such as the U.S. dollar). Don’t be surprised if this happens over the next five years!
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