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Exchange rate and cross country assets values

Second comments on Ronald McKinnon “The appreciation of the yuan: A compromise solution”, 30/03/2010, http://www.eastasiaforum.org/2010/03/30/the-appreciation-of-the-yuan-a-compromise-solution/

Maybe, a potential solution is for the US and the Chinese governments to sign an agreement to change the denomination of Chinese official holdings of bonds from current $US alone into a mixed denomination of the two currencies, so the impact of the relative movement of the two currencies on the yuan value of those assets can be cushioned to a certain degree.

This de-coupling between trade issues and assets holdings may make both sides more comfortable and leave them enough flexibility and rooms to make changes to the exchange rate to address trade imbalances should they be deemed as important.

I am, however, not sure how they can handle the official reserves of $US, though. That is an issue that the Chinese central bank has to confront and consider how to handle it.

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