| Until recently the RMB has been steadily appreciating against the US dollar and many people have seen it as a one way bet to buy RMB with dollars. This has resulted in more and more foreign money being converted to RMB further fueling the pressure on the RMB to appreciate. In order to keep this appreciation under control, the central bank of China has had to buy dollars (dollar denominated assets). If the inflow of speculative money is not kept under control, this money will flow into Chinese investments (property and the stock market) causing an asset bubble as occured in Japan. That's why the central bank wants the RMB to appreciate--in order to discourage speculative investment in China. On the other hand, if the RMB appreciates too fast, Chinese exporters will face difficulties. Recently, it seems the central bank have tried a new strategy: halting the appreciation of the RMB in order to confuse would-be speculators and prevent further pressure on the RMB to appreciate. Also there has been pressure from Chinese exporters, who are afraid of declining sales due to the combination of the weak global economy and appreciation of the RMB. In any case, the central bank in China has a delicate and difficult balancing act: - they want to avoid investing in US dollar denominated assets that might decline in value - they want to control the appreciation of the exchange rate (too slow and there may be an asset bubble -- too fast an exporters will hurt) I imagine that the appreciation of the RMB will restart after a few months. In any case, let's hope they get it right. |
China-US Economy Discussion