China to crash U.S. dollar?

[Dauphin]

Read Saras's post.

[Tingkai]

If you think my explanation is wrong, then provide an alternative explanation. Or ask questions about what you don't understand.

[Dauphin]

My question:


How does China peg the Yuan?

[Dracon II]

Don't force Dauphin to explain his question... I think he's preparing for a Socratic bodyslam. Don't ruin the suspense!

[Tingkai]

Okay, what the heck, let's see what kind of moves Dauphin wants to throw. Here's the basic explanation.

The People's Bank of China says it will sell yuan at a rate of 7.57 rmb for $1, with some limitations (for example, proof of investment or trade).

Because China has a trade surplus there is excess demand for the yuan which means no one wants to sell it for less than the PBOC rate.

So if I have yuan and want to buy dollars, I'm not going to pay more than 7.57 rmb of the dollar because I can get that rate from the PBOC. For example, if someone said they'll sell $1 for 9 rmb, obviously I would say no.

If I have dollars, I'm not going to sell for less than 7.57 rmb because I can get that rate from the PBOC. So if someone says they'll buy my $1 for 5 rmb, obviously I would say no.

At the moment, the PBOC takes the dollars it exchanges or yuan, and buys U.S. assets. But it could easily take those dollars and sell them on the open market for any other currency.

Okay?

[Dauphin]

So you are saying that due to high demand for Yuan the PBOC buys a whole lot of dollars as a commitment to maintain the exchange rate? Therefore the PBOC is going to be continually buying dollars to maintain the peg, and if the US dollar loses value then the PBOC will pay ever more over the odds for those dollars. At the same time it's going to be dumping dollars at a market rate which is rather quite low. Logical no doubt.

Who picks up the tab?

[Tingkai]

Originally posted by Dauphin
if the US dollar loses value then the PBOC will pay ever more over the odds for those dollars.

This is the flaw in your thinking.

If the dollar loses value against, say the euro, this doesn't change the value of the dollar to the yuan, because the yuan is effectively pegged within a narrow trading band.

Originally posted by Dauphin
So you are saying that due to high demand for Yuan the PBOC buys a whole lot of dollars as a commitment to maintain the exchange rate?

Not exactly. In order to buy large amount of yuan, you need poof or trade or investment. So if you're a currency speculator and you go to the PBOC and tell them you want to buy a 100 million rmb, they will say no.

Currency exchanges are tied to trade and investment.

So it is not an unlimited commitment.

Originally posted by Dauphin
Who picks up the tab?

The PBOC can print all the yuan it wants to sell for dollars, but as it does, other economic forces come into play.

[Dauphin]

Originally posted by Tingkai


This is the flaw in your thinking.

If the dollar loses value against, say the euro, this doesn't change the value of the dollar to the yuan, because the yuan is effectively pegged within a narrow trading band.

Circular logic is wonderful. Shame that the dollars being sold on by the PBOC to the open market will clearly have lost value.

The PBOC can print all the yuan it wants to sell for dollars, but as it does, other economic forces come into play.

Quite, and its the Chinese economy that would be mostly effected by printing lots of money.

[LordShiva]

Originally posted by Tingkai


This is the flaw in your thinking.

If the dollar loses value against, say the euro, this doesn't change the value of the dollar to the yuan, because the yuan is effectively pegged within a narrow trading band.

Please remind us how China does that.

[Tingkai]

Originally posted by Dauphin
Shame that the dollars being sold on by the PBOC to the open market will clearly have lost value.

The PBOC prints up some yuan, sells it and gets US$100. It then sells the dollars and gets say 60 euros. Next time, it ends up with 59 euros.

What's your point? What are you trying to say? Do you believe that the yuan is not pegged? Do you believe that a controlled currency operates like a free-floating currency?

[LordShiva]

Originally posted by Tingkai
So? The only cost to the PBOC is the cost of printing money.

What about teh cost to teh Chinese economy?

[Tingkai]

Look at the Chinese economy and you will get your answer.

The economy is growing too quickly and Beijing is trying to cool down the economy through a number of other measures, such as requiring banks to keep higher cash reserves and by "vacuuming" cash liquidity out of the market by forcing banks to buy government bonds.

What's your point?

[LordShiva]

Originally posted by Tingkai
The economy is growing too quickly and Beijing is trying to cool down the economy through a number of other measures, such as requiring banks to keep higher cash reserves and by "vacuuming" cash liquidity out of the market by forcing banks to buy government bonds.

Is printing a ton of money a smart thing to do, given this?

[Tingkai]

The Chinese economy is growing at about 11 percent. What do you think?

[LordShiva]

I think it would be extremely "costly" to teh Chinese economy, even if "the only cost to the PBOC is the cost of printing money."