Holding down the Yaun

[cristiano]

Forgive me if this is a stupid question but it's something I just can't get my head around. I'd be grateful if anyone could point me in the direction of somewhere I can read up on this (not asking people to do my work for me ).

When China is reported/accused of holding down the value of the yuan, how are they doing this?

Surely the market makes its own decisions on relative currency values? If the economy is growing and interest rates are likely to rise, are there not traders at least that would be buying the yuan, pushing the value up?

Or are the Chinese increasing money supply more subtely than announcing a big QE programme? I guess this would account for their rising inflation? I'm just not able to see how a government can artificially hold down their currency (if that's what they are doing).

Thanks,
Chris

 

[scose-no-doubt]

buying/selling usd or usd denominated bonds to keep prices within band innit?
Hence huge CB reserves :S
Not sure whether all treasuries or some sovereign bonds too to keep basket which rmb is based on.
That's my understanding anyway.

 

[cristiano]

Ah, ok. So selling off the rmb in the same way the Japanese were selling the jpy recently. Isn't there a point at which this will become unfeasable, though and they'll have to resell all the usd (for example) they bought? Which would weaken the usd and strengthen the rmb?

 

[scose-no-doubt]

Dunno mate. There's so many state owned companies in china. Banks, construction etc. I'm betting they can loan those dollars out in another currency and spend on dollar denominated commods for as long as they have a positive trade balance. They just keep accumulating dollars. Bear in mind I'm an accountant not an economist lol. This makes sense to me but may not be the way things work.

 

[cristiano]

Thanks for that, appreciate the answer.
You seem like a fairly decent guy for an accountant

 

[scose-no-doubt]

I'm an excellent guy.
Martinghoul and gooseman trade bonds so hopefully that they pass by the thread when they on t2w. They'll give you a proper explanation.
Just be wary on T2W of people with PhD's in wikipedia or google. Sometimes they can be convincing