Efforts by the People's Bank of China to peg the Yuan to the Dollar is getting expensive. Here is the wire report: "China’s PBOC added 400 billion Yuan (about $61 billion) to the financial system today through a reverse repo operation; it is the biggest one-time cash injection in three years. That brings total cash injection in January up to one trillion yuan. There is a seasonal demand for cash because of the Chinese New Year holiday, which starts on February 8. So the PBOC is trying to make sure there is no liquidity problem as families withdraw money because the banks shut for a week during the holiday; but the larger injection is also said to be a reflection of the recent market movements and the economy."
Attempting to peg the currency or even to keep it within a band is a fool's errand by the Chinese. Few recall the currency attempt by British leadership to keep Pound Sterling within a set band (pegging like the PBOC) in a face off with George Soros in the 80's. It was the speculative start for Soros launching the legend of speculation his funds garnered over the years, and making him a billionaire in the process.
The message and lesson learned for me was currency (like water) seeks it's own level, and ultimately you must let your currency free float, or speculators will make you pay the price. Soros's actions in the 1980's unseeded leaders and helped shape the Euro we know today. I expect a free floating Yuan will be a reality in years to come as the PBOC accepts the responsibility of participation in global markets for the people of China.
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