Would the Chinese central bank be concerned about the fall in the dollar against the euro and other free floating currencies? Absolutely, the bank is targetting the price of its currency in order to sustain demand Chinese exports. If the dollar falls against other currencies, this means that the yuan is falling against other currencies. Other things equal, this increases demand for China's exports from other countries, which could mean that they would opt to raise the value of the yuan against the dollar to offset this increase. (The Chinese government has been worried about its economy growing too fast.) Is the Chinese bank worried that this reduces the value of its dollar holdings as the NYT claims? Not unless they are morons, which is not plausible. Virtually every economist in the world believes that the dollar will be falling at some point in the future. The logic is simple. The trade deficit is unsustainable. The only way (other than a prolonged and severe recession) to bring the deficit down is to reduce the value of the dollar. Certainly the Chinese central bank understands this situation. It is apparently willing to hold large amounts of dollar assets in order to sustain export demand for its products, even though it will have to suffer large losses on its holdings. Since they must know that losses are inevitable, they cannot possibly be too upset about seeing some of those losses take place last week. That was the risk they knew they were taking.
--Dean Baker
