The China Currency Peg
The Chinese have been labelled as a “currency manipulator” by the United States, and now months later are working to remove the peg and allow for a freer floating currency.
Why China Wants the Yuan Cheap
China has a lot to gain from a weak currency. By pegging the value of the currency to the US dollar, China can make sure that its exports are always roughly the same price in US dollars year after year. Also, since the oil markets are priced exclusively in USD, China can take out one of the most volatile pieces of production and keep prices stable regardless of energy costs. Relatively speaking, that is.
China Currency Manipulation
To say that China is manipulating its currency may be a bit of a stretch. In actuality, China is allowing its currency to freely float but only against a basket of currencies weighted as it desires. So, for political talking points, China gets the leg up, but yes, the Chinese do still have a huge impact on the price and relative value of their currency.
Ending the Peg
China announced yesterday that it would allow more market forces to decide the value of the renminbi (yuan). How far China will go to end its currency peg is beyond me, but there is one thing that is certain, freeing up the Renminbi’s value will not create a lower priced currency. That much is simple.
