18 June 2010
The People’s Republic of China (PRC) has maintained a pegged exchange rate regime targeted at the United States (US) dollar. In the process it has accumulated more than 2.4 trillion dollars in foreign currency reserves. The People’s Bank of China has sterilized these interventions and prevented inflation from accelerating. However, sterilization operations have forced commercial banks to hold more and more central bank bills, interfering with the allocation of credit. They have also produced an increasingly inefficient allocation of resources since private and social rates of return are higher for investments in the domestic economy than for investments in US Treasury securities. Many have thus advocated a more flexible exchange rate regime for the PRC.
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