for example, Central Bank (CB)'s asset consists of US bills (1), the load to invesetment bank, say, Nanfang zhengquan (2), and the investment to Gonghang and Jian hang(3).
for (1), if dollar goes down, then,
for (2), will Nanfang zhengquan be able to pay CB?
for (3), do you think the two banks will pay back the 45 billions dollars to CB?
what's more, the CB is making loss every second!
to keep the exchange rate fixed, they need to buy dollars from commercial banks, and invest their dollar asset into US bond. To get dollars from commercial banks, CB needs to give Renminbi to them. if so, the money supply will increase, and the price level will fly. nobody likes inflation. One choice for CB is to issue bills to commercial banks and pay money to commercial banks. The gap between the two rates makes CB very uncomfortable since that means loss! of course, this loss will be covered by Finance department according to Central Bank law, article 14.
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