Conveniently overlooked

Paul Krugman unthreads the vexing dollar-yuan currency peg and sheds light on how China is hurting poor countries as a result... Of course, the Chinese couldn't care less...

The value of China’s currency, unlike, say, the value of the British pound, isn’t determined by supply and demand. Instead, Chinese authorities enforced that target by buying or selling their currency in the foreign exchange market — a policy made possible by restrictions on the ability of private investors to move their money either into or out of the country. ...The crucial question, however, is whether the target value of the yuan is reasonable. Until around 2001, you could argue that it was: China’s overall trade position wasn’t too far out of balance. From then onward, however, the policy of keeping the yuan-dollar rate fixed came to look increasingly bizarre. First of all, the dollar slid in value, especially against the euro, so that by keeping the yuan/dollar rate fixed, Chinese officials were, in effect, devaluing their currency against everyone else’s. Meanwhile, productivity in China’s export industries soared; combined with the de facto devaluation, this made Chinese goods extremely cheap on world markets. The result was a huge Chinese trade surplus. If supply and demand had been allowed to prevail, the value of China’s currency would have risen sharply. But Chinese authorities didn’t let it rise. They kept it down by selling vast quantities of the currency, acquiring in return an enormous hoard of foreign assets, mostly in dollars, currently worth about $2.1 trillion. Many economists, myself included, believe that China’s asset-buying spree helped inflate the housing bubble, setting the stage for the global financial crisis. But China’s insistence on keeping the yuan/dollar rate fixed, even when the dollar declines, may be doing even more harm now.

...And that’s [keeping its currency pegged to the dollar] a particularly bad thing to do at a time when the world economy remains deeply depressed due to inadequate overall demand. By pursuing a weak-currency policy, China is siphoning some of that inadequate demand away from other nations, which is hurting growth almost everywhere. The biggest victims, by the way, are probably workers in other poor countries. In normal times, I’d be among the first to reject claims that China is stealing other peoples’ jobs, but right now it’s the simple truth.