First, let me stress that I teach/research primarily in the area of corporate finance. So, my grasp of the subtleties of exchange rates is probably somewhere south of the Cynical Prof's.
Having said that, I'll follow his lead and express my thoughts. The higher ups in the Chinese government are an unusual bunch. More than a few of them are remnants of the "command and control" economy from when they were a closed, communist society. Now, they're coming out to play with the rest of the world.
As a result of wanting to be accepted as legitimate members of the world economy, I'm guessing that they're trying to make as though their economy is up to world standards. So this step, while not "really" the same as letting their currenty float, may be an attempt to convince the world that they're making an effort.
Or, it might be a genuine attempt to start their currency on the path to a floating exchange rate. I really don't know, and am only guessing.
Having said that, I have to admit that I don't yet trust the Chinese. That may be a result of of the stories I've heard about them appropriating technology from companies that set up facilities there. Some of it may be distaste for the horrific attitudes they have regarding opennes and human rights. And to be true, a lot of it is my overall lack of familiarity with Chinese history and culture.
As with just about anything, time will tell.
My ignorance of is vast when it comes to exchange rates, but as my students know that doesn't usually stop me from expressing an opinion.
I think the key thing here is that they have shifted what they will use as a peg or target for their currency. Before it was the dollar period. Now it is some "basket" of currencies. I would assume the dollar is still a big part of the basket; but, we should see some fluctuation in the yuan as the dollar moves relative to the other currencies in the basket. To make things exciting, the article I read said the Chinese will not disclose the contents of the basket.
Whatever the technical details, I think I will go to Wal Mart and load up this weekend.
UP - Do you think this is a step towards the Chinese allowing their currency to really float or just window dressing (since the band they let the currency float in is essentially zero)?
Commenting by HaloScan
