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Christopher Balding

The Fed Puts China in a Bind

China's monetary goals are in conflict. Rising U.S. rates may bring matters to a head.
Interesting times.

Interesting times.

Photographer: Alex Wong/Getty

Last week, when the U.S. Federal Reserve raised interest rates, it was a sign for many investors that things were getting back to normal. For China, facing large-scale capital outflows and a declining currency, it was a sign of a serious problem.

For the past decade, China has maintained a "soft peg" of the yuan, allowing it to rise and fall within a narrow band against the U.S. dollar. This has worked, for the most part, because the two countries have had relatively synchronous business cycles and broadly similar monetary policies. But now their economies are diverging in important ways.