The anatomy of a peg: lessons from China’s parallel currencies

Saleem Bahaj and Ricardo Reis

No 2401, Discussion Papers from Centre for Macroeconomics (CFM)

Abstract: China’s current account transactions use an offshore international currency, the CNH, that co-exists as a parallel currency with the mainland domestic currency, the CNY. The CNH is freely used,but by restricting its exchange for CNY, the authorities can enforce capital controls. Sustaining these controls requires tight management of the money supply and liquidity to keep the exchange rate between the dual currencies pegged. After describing how the central bank implements this system, we find a rare instance of identified, exogenous, transitory increases in the supply of money and estimate by how much they depreciate the exchange rate. Theory and evidence show that elastically supplying money in response to demand shocks can maintain a currency peg. Liquidity policies complement these monetary interventions to deal with the pressure on the peg from financial innovation. Finally, deviations from the CNH/CNY peg act as a pressure valve to manage the exchange rate between the yuan and the US dollar.

Keywords: Chinese monetary policy; Gresham’s law; Goodhart’s law; Money markets; RMB (search for similar items in EconPapers)
JEL-codes: E51 F31 F33 G15 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2024-01
New Economics Papers: this item is included in nep-ban, nep-cna, nep-mon, nep-opm and nep-pay
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Working Paper: The anatomy of a peg: lessons from China's parallel currencies (2024)
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