Brad Setser

Brad Setser: Follow the Money

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But what is in the other 50% of China’s basket? Hong Kong dollar?

by Brad Setser
January 27, 2006

China's central bank governor Zhou said the dollar accounts for 50% of China's currency basket.  From Market News International:

The weighting of the US dollar in the currency basket which China uses as a reference for the value of the yuan is less than 50 pct, state  media reported. The US dollar accounts for "much less than 50 pct" of  the currency basket, Zhou Xiaochuan, central bank governor, was quoted as saying.

Yeah, right.  So how come market estimates last fall put the dollar's share of the basket far, far higher — as high as 98%?  See Sun-Bin.

This ranks up their with the assistant Governor's statement that the market sets China's exchange rate (see my previous post)

I haven't seen estimates of basket weights based on what has happened since the dollar started to fall a bit against a range of currencies.  But when the dollar was rising during the fourth quarter, a basket peg — particularly one with only 50% dollars – would have implied letting the RMB fall against the dollar to limit its appreciation against the euro and the yen.   That didn't happen.

Last fall, China decided not to irritate Mr. Grassley and others in the US congress by letting the basket's operation undo the the tiny July revaluation.   That means China either changes the basket weights rather frequently to suit its purposes, or it still pegs to the dollar …  or a mix of US and Hong Kong dollars …

8 Comments

  • Posted by Navin

    Brad et al,

    China is pegging to the dollar to keep its export driven economy going but why is it not pegging to EURO ? Sure, it exports to euro land as much as it does to US.

    Does pegging to dollar ensure a decent pseudo peg to Euro as well ?

  • Posted by bsetser

    Navin — good question. China shouldn’t peg exclusively to the dollar any more in my opinion. But they couldn’t depreciate against the dollar as it rose v. the euro to keep the rmb from rising v. the euro in the second 1/2 of 05 either, for political reasons. China’s current regime has two faults — China is undervalued v. both europe and the US, and by pegging exclusively to the dollar, China exposes itself to big swings v. the euro/ europe.

  • Posted by Movie Guy

    Brad — But what is in the other 50% of China’s basket?

    Air. The same thing that is in the other side of the magic black box.

  • Posted by realist

    i should probably be punished for using this obvious stereotype, but maybe the chinese really are inscrutable.

  • Posted by NAvin

    A bit off topic but interesting link

    Petro dollars powers Indian Sensex closer to 10,000 mark

    http://www.dnaindia.com/report.asp?NewsID=1009799&CatID=4

    A new source of inflows is oil money. According to market insiders, money is pouring in from many oil-exporting countries, including Venezuela. “Though they continue to put two-thirds of their money in dollar-denominated assets, the remaining is parked in assets denominated in yen and rupee, among others,” said Anil Sarin, co-head of equity at Prudential ICICI Mutual Fund.

  • Posted by Anonymous

    hi

  • Posted by cly

    non

  • Posted by Anonymous

    A new source of inflows is oil money. According to market insiders, money is pouring in from many oil-exporting countries, including Venezuela. “Though they continue to put two-thirds of their money in dollar-denominated assets, the remaining is parked in assets denominated in yen and rupee, among others,” said Anil Sarin, co-head of equity at Prudential ICICI Mutual Fund.

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