Currency

We often hear that China is manipulating its currency and the question is, what is the reason. What are they trying to achieve. Think of money as any other commodity. For example the US dollar is in demand because the safety of the Euro is in doubt. Many countries around the world are buying US Treasuries because they are considered safe.
When a lot of people want your money it becomes more valuable. The value of the US dollar is determined by market forces, that is, supply and demand. The US is upset with China because they will not allow market forces to determine the value of their currency which is the Yuan. If the demand for the Yuan increases the government prints more money to bring up the supply and cover the demand without raising the price of a Yuan. It the demand for the Yuan decreases the government pulls in Yuan and the price remains constant. The reason they do this is to keep the value of the Yuan low compared to what it would be if it were allowed to float in the market place. When this is low then China can sell their exports at a cheaper price and since their economy depends heavily on exports this is just what they do. Since we cannot compete with the cheaper Yuan we lose jobs and they gain jobs.
The US has complained over the years about this but recent moves by the Fed have made us look like hypocrites, since we have been printing dollars by the trillions which is in effect what China does. China has about a trillion dollars and the only place they can spend them is in the US and so they continue to buy US bonds. By printing large sums of money we are setting the stage for inflation which means the dollars that China holds will be worth less in the future. The only thing China can buy with dollars outside of the US is oil and they have been buying long term contracts around the world so they won’t get stuck with worthless dollars when the inevitable inflation hits.