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Yes, it is, as it has to because it becomes too expensive for the Chinese treasury to subsidize its exporting interest groups indefinitely, and that is who is really complaining when "China" says it wants a different reserve currency.  But the long flat segments that show up in this chart show dollar pegging interrupted by periods of float or devaluation (or vice versa), not pegging against other currencies.  If it were trying to switch it's peg to another currency we would have to see longish flat segments in exchange rates with other currencies, and I don't think that's the case. (I haven't checked well enough to say for sure, though.)
by santiago on Fri Nov 6th, 2009 at 02:44:17 PM EST
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It doesn't cost the Chinese treasury anything except RMB¥ to discount its exchange rate - and that's not something that it runs out of the ability to produce, after all.

And its peg is to a basket of currencies, and they do not reveal the composition of the basket or the pegged rate, so they could definitely reduce the weight of the dollar in the basket but manipulate the peg to mask the move - where you would notice it is not in the exchange rate data but in the foreign exchange reserve data.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Nov 6th, 2009 at 06:12:23 PM EST
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I disagree.  A peg is observed in the exchange rate -- if flat it's being pegged.  Nothing else can produce a flat exchange rate given that their rates observed in other currencies are anything but flat. And the data show that China is currently not using a basket of any kind -- just the US dollar. It appears to have given up on any semblance of either a basket or a float in mid 2008, so they're certainly not walking their talk if they still claim to be pegging to a currency basket.

It costs the Chinese either Yuan (buying power in China) or other currencies (buying power in other places) to prop up the value of the US dollar.  This is a policy subsidy that benefits a narrow exporting class in China, and it hurts those in China who would rather purchase more stuff made in Europe or save their purchasing power in Yuan for later years. (China suffers from high inflation, partly due to buying dollars with Yuan.)  Either the Chinese authorities are ignorant of this, or they must be shifting blame for their policy decisions regarding export-oriented growth onto the US.

by santiago on Fri Nov 6th, 2009 at 09:43:30 PM EST
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... I disagree that a traffic circle should be called a traffic circle, because of all the openings in the circumference ... I think it should be called a traffic celtic cross ...

... but a peg is an immediate target in trading in some other currency. You can obviously walk the peg in order to target some other objective - including in order to maintain a stable exchange rate in another currency - so a currency peg can easily show up as a moving exchange rate.

What doesn't happen with a peg, if it is performed competently, is a lot of volatility in the exchange rate. A relatively stable exchange rate with a lot of "noise" along the way would be an indication that something other than direct pegging to maintain that exchange rate is taking place.

Mainstream economists, of course, get sloppy about it, since they can ignore the differences that make a difference with absurd assumptions about expectations and information - witness the neutrality of money assumption for an especially obviously absurd assumption completely unanchored in reality which is nevertheless the "normal" assumption to make.

However, when considering open money in the real world, you have to distinguish between the currency whose exchange rate you are targeting by buying and selling that currency, and the exchange rate management targets that you have.

We all assume that there is a substantial weighting of dollars in the composite currency peg that the Chinese in fact use, but the volatility in the exchange rate that you have shown suggests that there may not be as heavy a weighting as we have been assuming.

That is, what would you see if country A was pegging with currency B while trying to keep A:C exchange rates steady? In a period that B:C was moving rapidly, the peg would be reset frequently ... possibly daily, certainly once a week or more ... between each reset, the A:C exchange rate would move like the B:C exchange rate, and with each reset the A:C exchange rate would jump back toward the target A:C rate.

To infer which currency or currencies dominates the composite peg, you'd look for a currency or mix of currencies that show a rapid change in B:C exchange rates when there is a lot of volatility in the A:C rate, and slow change in B:C exchange rates when there is less volatility in the A:C rate.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Nov 7th, 2009 at 05:23:45 PM EST
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