Monday, August 11, 2008

China encourages US exports with currency intervention

I wanted to follow up a comment that I received on a previous post. Janie asked: “Isn't China still keeping its currency artificially low? What fun this all is!”

My answer is: Yes, China is keeping its currency artificially low relative to the US dollar (USD), and foreign exchange is always tons of fun!

There are many reasons why a government may want to peg its currency to another currency, let’s say the USD. One theoretical reason is to inherit the “good measures” of foreign monetary policy. Another is to target export growth, and enjoy capital flows into the economy and improved standards of living. The Chinese are driving big cars, drinking French wine, and hosting a memorable Olympic games. All this is thanks to the good old US of A.

China’s holy grail of growth is revenues stemming from US exports, and it has amassed $1.8 trillion in foreign exchange (lots of it in US dollars) by keeping its currency low in order to make its goods very affordable. In the first quarter of 2008, 11% of all US imports came from China. How much is 11%? A lot compared to the 12% of US imports that come from a country in which the US shares a border and has several free trade agreements, Canada.

China dropped its peg to the USD in 2005 for a peg against a wider basket of currencies (USD, Euros, pounds, Yen, etc.). Due to this change, the USD has been losing value relative to the Chinese Yuan since 2005. However, the People’s Bank of China (PBoC) still intervenes in the USD foreign exchange market to keep it strong relative to the Chinese Yuan. The Chinese Yuan would appreciate (gain value) much faster than it is currently doing if the PBoC was not intervening. China will not allow for its currency to appreciate much more, and will fight for its value against the USD. there is too much for China to lose.

The Hong Kong Monetary Authority (HKMA) maintains a tight peg to the USD. Again, it does this to generate export revenues from the US. As a omparison, notice how the UK pound floats freely in value with fluctuations in demand and supply.

Please leave comments. Best, Nontruths


  1. Such a nice blog. I hope you will create another post like this.

  2. The next question is about the effect of the US consumer spending decrease that is happening now. "We done spent" our economic stimulus checks. Now what?