Re: How Does Chinese Currency Work?
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I'm pretty sure that the Chinese govt. does this by offering to buy dollars with Yuan at whatever they want the price to be (I think its 9 Yuan : $1), regardless of the true market value. Since the Chinese are offering more for dollars than anyone else, the value rises to the Chinese government level.
What this means however is that China has tens of billions of dollars sitting in accounts or used to buy stuff. I have only a vague recollection of what the stuff it, but I think it includes foreign companies and US T-Bills (Government debt).
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One of the reasons that the Chineese can maintain the peg they have to the US $ is due to the booming Chineese economy. The quantity equation of money: the quantity of money (M) times the velocity of circulation (V) equals the price level (P) times output (y), MV=Py. So can get away with printing more yuan to soak up the US $ and not significantly devalue your currency. If M increased by a great deal while V and y were constant the P would increase alot i.e. inflation. The Chineese and the Japaneese have and probably will continue to finance the U.S. budget deficit to a great extent.
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