[laserboy]

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China's currency, the Yuan being pegged to the American dollar has been a topic of debate lately. I'm doing my best to understand the currency markets, but I fear the topic may be over my head so please correct me if I'm wrong anywhere. The basic idea is that the Chinese government purchases enough US T-Bills to control the supply and demand such that the currency markets maintain the peg of approximately 8.23 yuans to 1 dollar conversion.

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The yuan is LITERALLY pegged to the dollar at the rate of 8.28 to 1. It is not subject to fluctuation on the foreign exchange markets and cannot be manipulated by central bankers.

Central banks from other Asian countries with floating currencies, such as Japan and South Korea, do participate in currency manipulation as you describe. They buy massive amounts of dollars under the rationale that it will devalue their own currency and make their exports more competitive. This in turn fuels our massive deficit spending.

The US government does not need to take any action to counter this manipulation. The US consumer does it for them whenever they buy a product that is made outside the US. That money is eventually repatriated into some other foreign currency, ultimately devaluing the dollar.

Regardless currency manipulation is just a short term solution to a long term problem. The only permanent solution to a trade deficit is to produce a product that is competitive in the global marketplace.

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From an individual perspective, does buying a small amount of Chinese Yuan make sense in the hopes that the currency may float eventually? This seems to have little risk if the peg is maintained, but high potential upside. Assuming of course that the currency is indeed being artificially undervalued by China's monetary policy as many believe.

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Your logic is correct... The problem is that everyone in the world is already aware of this and has loaded up on Chinese yuan denominated assets. There is already billions of dollars of hot money fueling massive asset bubbles in China. What will happen after the yuan is revalued and when all the money comes flowing out? If you figure it out, please let me know!