2005-07-22

Smart move, China

China said that as of 7 p.m. (1100 GMT) July 21st it was adjusting the currency's value to 8.11 and tying it to a basket of currencies of China's main trading partners. Smart move.
  1. Decoupling exchange rate from US$, so that the peg reflects the trading mix.
  2. A baby step -- as I have said before, "cross the river stone by stone" (摸着石头过河)-- to test the water, avoid major mistake by seeing the effect before moving further
  3. Discouraged speculator -- as 2% is almost the cost for the leveraged speculator who had started a year ago -- speculating by rolling long RMB is not a profitable position

Going forward.

  1. Less pressure to reval if US$/EUR/JPY rate changed, because it is only the combined weighted average that matter
  2. May continue to have small steps every other year, provided that impact on export/job is proved to be small
  3. If speculators are still active, the changes are going to be small and it will be such that no speculator who longed RMB for over a year (rolling long) would profit significantly

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