Will China’s Currency Peg Be the Next to Fall?
I suspect China’s leadership is wary of unpegging the RMB for one reason: the FX market is too large to manipulate for long.
What is China’s currency the renminbi (RMB, a.k.a. yuan) really worth? Nobody knows, because price discovery has been thwarted by the RMB’s peg to the U.S. dollar. This peg has shifted over time, from 8-to-1 some years ago to the current peg of 6.24-to-1.
What does the peg mean for China’s currency and economy? Gordon T. Long and I discuss the many issues in our latest video program (see below).
Now that the USD has gained 16% in less than a year, that rise is dragging the RMB higher with it, making China’s goods less competitive in markets outside the U.S. (and countries which use the USD as their currency).A pegged currency rises and falls against other currencies along with the underlying currency. As the dollar weakened from 2010 to mid-2014, China’s RMB weakened along with it. This allowed Chinese authorities to lower the peg without affecting the competitive value of the RMB.
This major move has prompted Chinese authorities to widen the peg’s range to allow the RMB to weaken slightly against the dollar. Japan’s stunning devaluation of the yen has prompted much speculation that China will be forced to either end the peg to the USD or loosen the peg to match the depreciation of the yen.
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