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Q: China's currency peg ( Answered 4 out of 5 stars,   0 Comments )
Subject: China's currency peg
Category: Business and Money > Economics
Asked by: automaton-ga
List Price: $8.00
Posted: 24 Nov 2004 09:03 PST
Expires: 24 Dec 2004 09:03 PST
Question ID: 433459
How does China keep its currency pegged to the dollar?
Subject: Re: China's currency peg
Answered By: easterangel-ga on 26 Nov 2004 17:50 PST
Rated:4 out of 5 stars
Hi! Thanks for the question.

Before providing a rating, please ask for clarification if you will
need further assistance in the answers I have provided below.

In order to keep its currency (yuan) pegged to the dollar, China
practices the fixed exchange rate system. has a good
explanation of how fixed rate exchange systems are done by the
government of a particular country.

The central bank of the government first determines a set price of its
local currency against a major world currency (ex. US dollar). The
central bank then buys and sells its local currency in order to
maintain the exchange rate.

?If, for example, it is determined that the value of a single unit of
local currency is equal to USD 3.00, the central bank will have to
ensure that it can supply the market with those dollars. In order to
maintain the rate, the central bank must keep a high level of foreign
reserves. This is a reserved amount of foreign currency held by the
central bank which it can use to release (or absorb) extra funds into
(or out of) the market. This ensures an appropriate money supply,
appropriate fluctuations in the market (inflation/deflation), and
ultimately, the exchange rate. The central bank can also adjust the
official exchange rate when necessary.?

?Floating and Fixed Exchange Rates? by Reem Heakal 

Our next article confirms this practice in order to peg the price of
the Chinese yuan to the US dollar.

?To maintain this fixed exchange rate, the central bank of China has
had to intervene in the foreign exchange market.  It sells yuan in
exchange for dollar denominated assets when the demand for the yuan
increases and it buys yuan with dollar denominated assets when the
demand for the yuan decreases. Recently the central bank has
intervened very heavily in the markets to prevent the yuan from
appreciating.  Since the end of 2001, dollar buying has been so great
that the foreign reserves held by the Chinese government have risen by
$153 billion to over $360 billion.?

"China?s Exchange Rate Regime and its Effects on the U.S. Economy" by
John B. Taylor Under Secretary of Treasury for International Affairs 

Search terms used:
yuan "fixed exchange rate"  
process fixed exchange rates dollar

I hope these links would help you in your research. Before rating this
answer, please ask for a clarification if you have a question or if
you would need further information.
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Google Answers Researcher
automaton-ga rated this answer:4 out of 5 stars
The links provided answered my question in a thorough manner. The
section in one of the articles about the history of the currency
exchange going back to the gold standard was especially informative.

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