How does China maintain its fixed exchange rate policy?

Expert Solution

A government who wants to maintain fixed exchange policy does so by buying or selling their own currency in the open market operations , and this is what Chinese government do so and this is the main reason why china maintain reserves of foriegn currencies.

So is the exchange rate between china and other countries drifts too far from the fixed exchange limit then china sells it's own currency and purchases foriegn currency , this results in price of the Currency to fall in its value

Same way , if the exchange rate between china and other countries drifts too below the fixed exchange limit then Chinese government sells it's own currency by selling its reserves in the market, this results in Increase in demand in the market making the domestic currency to be stronger.

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Rahul Sunny answered 2 years ago

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