China has pegged its currency against the dollar in order to sustain its export market in the United States. It is interesting to note that this policy is proving to be increasingly costly to China. According to the NYT, China's central bank is now buying dollars at the rate of $40 billion a month in order to keep down the value of the yuan relative to the dollar. At this rate of buying dollars, China's central bank will aquire another $1 trillion in just over two years.
To realize the cost of this to China, the dollar has fallen by close to 10 percent against the euro in the last year. If China held $700 billion in dollars (70 percent of its foreign exchange reserves), then its "high dollar" policy cost it $70 billion last year. If it acquires another $1 trillion and the dollar then drops another 10 percent, the loss would be $170 billion.
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