I’ve been trying recently to get a handle on the mechanics behind China (and really, any country) accumulating foreign reserves, and the relationship with its current account surplus/deficit and inflation. One question is particular is how they maintain the yuan at the given level. I understand that they can simply sell their foreign reserves in exchange for yuan if they want to increase the value of the yuan, or issue more yuan to decrease the value, but is it literally as simple as that? When people talk about yuan (or the relevant currency) in this case, is it the actually currency in circulation, or is there some sort of relationship with bank reserves that I’m not aware of. Thanks for any help on this. If there is a link that answers my questions, it would be greatly appreciated.
My understanding is that in general that’s how it works, increase/decrease amount of yuan through the forex market, not through the banking system, like interest rates. Think of the yuan as being completely floating with the Chinese central bank manipulating its supply and demand to keep its level within the stated band.
sounds like a good level 2 question…