Problematic Peg

China’s wish to peg the yuan to a basket of currencies and not just the dollar is an attempt to weaken its currency, but the strengthening dollar makes the task harder. To keep the existing peg, China’s central bank (PBoC) must sell dollars and buy yuan, removing yuan from circulation, stymying the PBoC’s efforts to ease credit. Of course, breaking the peg risks losing investor confidence and increasing capital outflows.