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Chinas new forex rules arouse debate

If taking the Chinese currency rules literally, one might think that the central bank of China has a troublesome job on its hands - gathering and controlling the $2 trillion a day forex market. China's new currency regime has changed the previous Yuan-Dollar artificial attachment and forced the Yuan to rank itself versus other strong foreign currencies.

If the Chinese central bank wants to control the Yuan's growth it will have to focus on stabilizing both the dollar and the Euro at the same time, not an easy job to say the least. It will have to keep the dollar/euro from jumping up or down in the almost $2 trillion forex market. Many analysts claim that this new regime shouldn't be taken with face value, as its full implementation seems very unlikely. China has dropped the Dollar peg during this July. Currently the Yuan is measured versus a basket of the major currencies – the Euro, U.S dollar, Yen and the South Korean Won.

Many say that a strict enforcement of the new regulations will put China in a very problematic position. One of the potential problems is the un-correlated fluctuation in the euro/dollar rates. Rapid change in favor of one of these currencies and depreciation in the other can cause some unexpected problems. China can face a situation in which buying Euro with Yuan and the Selling it back for dollars can be cheaper than the regular market rate - making china a financial arbitrage.

Margaret Moore, Chief Editor. 09/14/05

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