Hi Yiwu Zhang,
Beg to differ. those same economists suggested that Chinese gov. should use them to invest in Chinese infrastructure, and reform banking, investment system... And I quite agree. And I would add, the Chinese gov. can buy some gold, or even Euro or Yen, just not the US treasury
Before those dollars can be used for any of the above suggestions, the dollars must be converted to another currency, either through foreign trade or the currency markets. China does not conduct domestic business transactions via the US$. If they were to try to fund projects, etcetera using the US$, then no one would want the $ at the current peg rate, because to do so is to discount the value of labor and materials at the exact same discount rate of the artificial peg of the two currencies.
So, the US$ must be converted to another local currency first. (The lone exception mentioned is the purchase of gold, which is usually denominated in the US$, but there is simply not enough gold available for purchase to make this option a significant choice for the Chinese authorities. All other choices require that the peg be dropped/ignored or the currency converted before being used elsewhere.) The Chinese authorities do indeed exchange the US$ for other currencies (such as the Euro, bhat, sen, pound, and so on), but the rate of exchange is at the quoted floating value at the time of the conversion. Since China's currency does not float, it's currency cannot be included in any exchanges, because the other party to the exchange would be losing value on the trade.
KJC |
