Despite the Obama administration's entreaties, China will continue to peg the yuan to the dollar — when the dollar drops, selling yuan in the foreign-exchange market and adding to its pile of foreign assets in order to maintain the yuan's fixed relation to the dollar.
The objective of the authorities is to maintain the yuan against a basket of currencies rather than pegging to the dollar as such – although that is how it is usually quoted.
It is better for American businesses for China to maintain current yuan rates until the worldwide recovery is on a firmer footing.
For the last nine years, China has maintained the yuan's exchange rate against the dollar by buying or selling dollars when necessary, a policy aided by the fact that China has much stricter currency controls than most countries.
The Chinese government is willing to incur these losses, however, because by buying US government bonds, it bids the value of the dollar back up so that China can maintain its dollar-yuan peg.
"Our goal is to maintain a basically stable yuan at a balanced and reasonable level," Mr. Wen said.
See articleGood cop, bad copIt was a mixed week for free-traders, as China stepped up its criticism of a bill in Congress that would impose retaliatory tariffs on countries with "misaligned" currencies, which is aimed at China's export-boosting policy of maintaining a weak yuan.
A yawing trade surplus still points to a stronger yuan, so we maintain our forecast for sustained appreciation, though expect the upward march to come in fits and starts.
China will maintain its policy of seeking a stable yuan, even as gains against the euro and Asian currencies hurt the nation's exporters, Mr. Wen said.
China, of course, pegs the yuan against the dollar; Malaysia and Hong Kong maintain "hard" pegs too, while most other countries in the region peg "softly", dampening short-term exchange-rate movements against the greenback.
