The Day of the Triffins

Bloomberg: ‘Impossible Trinity’ Ends in China as PBOC Allows Freer Yuan
In giving markets a greater say in setting the yuan’s level, Zhou Xiaochuan is bowing to Nobel-prize winning economist Robert Mundell’s maxim that a country can’t maintain independent monetary policy, a fixed-exchange rate and free capital borders all at the same time.

...A flexible exchange rate will increase room for the central bank to adjust monetary policy, PBOC Deputy Governor Yi Gang said at a briefing in Beijing last week. Ma Jun, chief economist at the central bank, said a more market-oriented pricing mechanism will help avoid excessive deviations from the equilibrium level and reduce the chance of sudden fluctuations.

Letting market forces decide the exchange rate has “untied the hands of the PBOC somewhat so that it can focus more on domestic economic activities when making monetary policy,” said Liu Li-Gang, head of Greater China economics at Australia & New Zealand Banking Group Ltd. in Hong Kong. “It will help align China’s monetary policy objectives.”
Which direction will China want to move domestic monetary policy and is that more in line with other emerging markets or the United States? If the United States, they wouldn't need to worry since the peg imports U.S. monetary policy. If the PBOC wants freedom, it is to make moves opposite to the the United States, moves that will depreciate the yuan.

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