Core contradictions – Henry C K Liu

From Asia Times Online (link):

The US trade deficit with China ballooned in 2005 to US$202 billion, more than one-quarter of the total deficit. Rising trade imbalance between the US and China in recent years has given rise to intense pressure from the United States on China to revalue the fixed exchange rate of its currency, which had been pegged at 8.28 yuan to a dollar within a narrow band of 0.03% for a decade, from 1995-2005. On July 21, 2005, after repeated pronouncements that no revaluation was necessary or even being considered, China nannounced a surprise 2% appreciation of the currency, putting it at 8.11 yuan to the US dollar. It also announced that the yuan would henceforth be pegged with the same narrow range to a basket of foreign currencies that includes the dollar, the euro, the yen and others likely to reflect China’s trade relationships with the rest of the world.

The components and weight of different currencies within the basket is not disclosed to the market. China appears to be following Singapore’s managed-float model, keeping both weights and effective bands confidential to allow maximum flexibility within a narrow range tied to a reference peg to the dollar. Many saw it as an obvious political move to appease US pressure.

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