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Simply slowing down its accumulation of currency reserves will increase the value of the yuan at a moderate pace.

But its a balancing act, because allowing the value of the yuan to rise too far, too fast will undermine the position of Chinese exporters in overseas markets and cut into China's current account surplus, and China requires those exports in order to purchase a wide range of commodity inputs ... not just oil, but iron ore, natural gas, coal, aluminum, concrete, etc., etc.

"Spending its foreign exchange reserves" is reasoning as if foreign exchange reserves are a dragon's treasure in a cave, somewhere. That is, as if the FX reserves are something that is intrinsically valuable in its own right, as opposed to a standing future monetary claim on future international income flows.

"Spending from Foreign Currency Reserves" implies a massive change in China's FXR policy ... that is, something like a doubling of value of the (indirect) FXR of the yuan/renminbi, going on a rough, back of the envelope reckoning that the yuan/renminbi is at something like 1/4 of its purchasing power parity value, and if it were to operate under a dirty float it would be more like 1/2 of its PPP value.

You are using "spending a bit out of FXR" as if it is an incremental change from the current FX rate policy stance, when the incremental change is to ease up on the steep discount of the yuan renminbi by not accumulating Foreign Exchange reserves at quite the same 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 Wed May 28th, 2008 at 01:48:02 PM EST
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