Cheap yuan fuels China's hot economy

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http://www.spiegel.de/international/world/0,1518,671310,00.html

In order to stimulate its economy, Beijing re-pegged its currency to the dollar. Doing so, however, has not only increased global economic imbalances -- it could ultimately harm China itself.
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But China, with its enormous export economy, has in fact expanded global imbalances with its aggressive exchange rate strategy -- the same kind of imbalances that were partly responsible for the most recent financial crisis and, as a result, ought to be corrected.China also risks triggering new, long-term trade conflicts, particularly with its neighbors. Since the beginning of the economic crisis, China has been diverting some of its exports to neighboring countries and away from Europe and the US, where sales have declined.

---- there is growing opposition in Europe and the United States to a policy whereby China is trying to export its way to economic health, essentially at the expense of the rest of the world. Throughout the country, Chinese provincial officials are vying to expand local state-owned factories and build new ones. The steel industry alone has increased its capacity by about a third in the space of only two years.
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Ironically, China, with its policy of keeping the yuan artificially undervalued, will ultimately harm itself more than anyone -- not unlike a rehab patient reaching desperately for more drugs. In order to keep the yuan down, the Chinese central bank must constantly buy up dollars. As a result, the country has amassed the world's largest foreign currency reserves, worth $2.3 trillion. China invests about two-thirds of its reserves in American currency, primarily in US treasury bonds. But as the dollar continues to fall, the value of this investment declines along with it.

China, however, has so far refused to enter into a debate over their economy's chronic dependence on manipulated exchange rates. At a meeting with EU representatives in Nanjing, Chinese Premier Wen Jiabao dismissed as "unfair" a politely worded request that he reduce the value of his currency against the dollar to rein in the flood of exports. Even US President Barack Obama, during his recent visit to China, was reluctant to be appropriately forceful in addressing the politically taboo subject.