Finance Journal

China's policy change to expand imports

From my economics class, I learnt that China cannot have policy changes as it will affect its exchange rate. Its currency is pegged to a set of currencies and when those countries make a policy change, China is forced to increase or decrease its money supply to maintain the exchange rate.

For example, increase in money supply in US will decrease the value of dollar, which puts an upward pressure in Renminbi. To maintain the fixed exchange rate, Chinese Central Bank must have to increase the money supply too and bring the value of renminbi down.

In Friday's news (WSJ) China mentioned that it is going to expand its imports. I am wondering how it can have a policy change without a change in the exchange rates. I sent out a mail to my professor requesting an explanation of how this works.

Labels: China, fixed exchange, policy change

posted by Valli @ 9:39 PM