The Wall Street Journal of Monday, January 22, offers some interesting and required reading for anyone investing in China or with plans to do so. The newspaper's editorial page offers an interview with Milton Friedman, the noted economist, and offers his views about what China should do with its currency. The interview was conducted by one of the newspaper's editors in July of 2006. Friedman, Nobel laureate in economics in 1976, died in November 2006. When asked if China should float the yuan, Friedman said it should. His reasoning?
"Pegging the Chinese currency to the U.S. dollar requires that China follow a policy which over time yields an inflation rate that is compatible with, though not necessarily equal to, the U.S. inflation rate." Friedman added: "When that is not the case, maintaining the peg will require control over foreign exchange transactions both current and capital."
According to the noted economist, China's future hinges on eliminating market controls and on opening their market as much as possible to have a free price system. If China continues to peg the yuan, then it can run into a situation in which they have an excessive amount of U.S. dollars or "they are in debt for an excessive amount of U.S. dollars and they will have a foreign exchange crisis." —Aleksandrs Rozens
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