Why emerging markets join the Dollar Club

The currency peg has been fashionable in Asia for years, and now it's spreading to other parts of the world. Niels C. Jensen explains the atrractions - and drawbacks - of joining the Dollar Club.

Try and imagine you live in a country where you can borrow at 6-7% per annum for a return of about 15% - obviously not guaranteed but pretty good odds. Would you do it? Of course you would. Now, imagine that country is China. Hold your horses, you may argue. The cost of borrowing is higher than 6-7% in China. More like 10-12% for the average entrepreneur. Well, don't bet on it. As the world increasingly becomes one big open market place, and the Chinese authorities stubbornly maintain their view that the best recipe for China is a Yuan which closely follows the US dollar albeit with a couple of percentage points of annual revaluation thrown in for good measure borrowing in US dollars to invest in China carries little or no perceived currency risk.

The dollar peg: what are the implications for emerging markets?

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