Could someone explain, or post a link explaining, in brief, how they peg the currency?
The Chinese government simply states they will buy/sell unlimited quantities of currency at a specific rate, e.g. the rate of 7.78HKD = 1 USD.
So if you have 1000 USD the Chinese government will give you 7780 HKD. Likewise if you have 7780 HKD the Chinese government will give you 1000 USD.[/quote]
I think it’s a little more involved than that. That’s what Vietnam does, but the black market price for dollars in Vietnam is a lot higher than what the government is willing to pay (we’re talking like, 10-15% difference). I think there actually has to be an adjustment in the supply of currency to match the pegged currency. For example:
America’s monetary supply increases by 4% in the year 2010 (hypothetical example). The Hong Kong SAR Government sends notices to the three main banks that have a license to print money in HK to print 4%x(exchange rate) Hong Kong dollars (to make the supply of Dollars and HK Dollars match up).
Alternatively, there’s some magic with the purchase of treasury bonds. I don’t know the specifics though, and would actually really appreciate it if someone could explain in more detail.[/quote]
In comparison to Vietnam, Vietnam tries to keep its currency too expensive compared to dollars — a hard feat to do, as you are fighting against market forces.
China, in contrast wants to keep its currency cheap compared to the dollar. That’s easy to do — just print more money.
Dangerous, mind you. But easy.