China's dollar dilemma

FT.com / Comment & analysis - China's dollar dilemma:

FT (subscription required) talks about the political pressure in China for a change in the exchange rate regeime. "Exchange rates are subservient to China's overarching aim of maintaining annual economic growth of about 7 per cent to 8 per cent, creating the 15m to 20m jobs a year that the government believes are needed to maintain social stability and meet expectations of higher living standards."

There is a lot more on this issue Brad Stetser's blog

It seems to me that there is a risk to changing excahnge rate policy in China and that the fortunes of the Chinese economy are very much mixed up with those of the US. Any fall in US economic growth will mean a reduction in Chinese exports (even without a currency change) and this will complicate the aim of creating 15m to 20m jobs a year. However, the threat of losses on FX reserves and the continued increase in money supply that the unsterilised intervention implies suggest that changing the exchange rate regeime would be advantagous.