Hyperinflation led to Hitler and Mao. What will China's currency manipulation lead to?
If imitation is indeed a sincere form of flattery, then China has flattered us mightily with its currency policy. Pegging its currency to the US dollar has worked wonders for its export machine and affirmed early on the importance of the US market. This much has been of mutual benefit. But as we all know, there can be too much of a good thing.
How China keeps the yuan low
As China exports, the sine qua non is that the purchaser of the wares must also purchase Chinese currency. This exchange is usually invisible to the purchasers themselves, but somewhere along the supply chain, someone on the purchaser’s behalf must buy Chinese currency with which to pay the exporter. Done repeatedly, this “demand” for Chinese currency would normally drive the “price” of the Chinese currency upward.
But as we know well from the political rhetoric accompanying President Hu Jintao’s recent visit, China keeps intervening to prevent its currency’s rise in order to maintain its meal ticket at the US lunch counter.