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China: No Way Are We Going To Break The Yuan Peg

China: No Way Are We Going To Break The Yuan Peg

Courtesy of Joe Weisenthal at Clusterstock

Various Currencies of Paper Money Hanging on Clothesline

Contrary to last week’s speculation, China insists that it has no plan to let the Yuan slowly appreciate against the US Dollar. Prior to the collapse, the country had allowed incremental strengthening, but in light of the economic weakness, that "glide path" was put on hold.

A Yuan peg is consistent with cheap money — since it essentially means printing enough currency so that the country can match the US’s torrid pace — and since all other indications are that China is not ready to tighten, then it makes sense that they’d continue.

Telegraph: According to an analysis from Morgan Stanley, the authorities are now seeking to recalibrate the message.

In its third-quarter monetary policy report on Thursday, the People’s Bank of China left out a standard phrase pledging to maintain the stability of the yuan and said that it would consider major currencies, not just the dollar, in guiding exchange rates.  This prompted speculation that the government was about to allow its currency to strengthen against the dollar, after having pegged it to the US currency for more than a year.

However, a report on Saturday by Xinhua, the state-controlled Chinese news agency said that the government would not allow the currency to gain against the dollar in the short term.

Wang Qing, chief Asia economist for Morgan Stanley in Hong Kong, said in a report to clients: "I consider this article an official effort by Chinese authorities to dismiss the renewed speculation of yuan appreciation in the near term."

As you can see from this chart, Morgan Stanley had previously expected the Yuan to appreciate to 6.55 against the dollar, from it current level around 6.8, sometime by the end of 2010.

morganstanleychinayuanprediction.png

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