ECB study: China's dollar peg poses long-term risks

A new research paper from the European Central Bank (ECB) has called into question the long-term viability of China’s currency peg against the US dollar, the Financial Times reported. This currency regime has led to a massive buildup of foreign exchange reserves, which in turn fuel economic overheating and create excess capacity in certain sectors, the paper claims. As a result, China may face challenges regarding corporate sector profitability and its ability to service debt, potentially undermining the banking sector. The report advocates a flexible exchange rate system as part of an independent monetary policy geared to domestic objectives. The ECB said the paper, written by two of its economists, does not necessarily represent the bank’s official view. However, it does reflect increasing unease in Europe about China’s currency policy.