Europe's trade deficit with China jumped 25 percent to a record in the seven months through July, increasing tensions on foreign-exchange policy ahead of a meeting of the Group of Seven nations tomorrow. Imports from China to the 13-nation euro area increased 21 percent to 93.4 billion euros ($133 billion) in the January-July period, according to figures published today by the European Union's statistics office in Luxembourg. That compares with a 15 percent increase in European exports to China and left the deficit at 59.9 billion euros. European officials, concerned that the euro's strength against the yuan and other currencies is making exports less competitive, will raise the issue of exchange-rate volatility with G-7 counterparts at tomorrow's meeting in Washington. While the yuan has gained almost 10 percent versus the dollar in the past two years, it has fallen more than 6 percent against the euro in that period. Europe is ``unlikely to hasten the pace of yuan appreciation,'' said Kimberley Forkes, an economist at Moody's Economy.com in London. ``China will let the yuan appreciate in its own time, not rapidly, and certainly not in any way that's going to discourage domestic growth.'' http://www.bloomberg.com/apps/news?pid=20601087&sid=a6R4xs6Srv6g&refer=home Chinese not only hoarding USD !
Chinese Yuan is pegged to the USD. As the USD depreciates against EUR, Chinese goods priced in Yuan become cheaper. Look at the EURUSD.
The China game: 1) make the whole world dependent on its exports, thus 2) take ownership of everyone else's currency and more importantly, kill everyone else's export biz 3) when the consumer is strong enough versus exports (ie like the US is/was), strengthen the yuan 4) take ownership of everyone else's assets with strong yuan. 5) Next boom: Eurozone/US export growth.
You forget about inflation. If you think U.S. should worry about inflation because of weakness in dollar. Think about the combination of 9% growth + weakness in yuen. I understand China doesn't want the currecy exchange to change too much because of the economic shock that it will brings, however, US cutting rate is going to change that. Between recession and inflation, US choose inflation. Between slower growth and hyper inflation, I think China will choose slower growth. That means they will need to pump up the yuen. That will also cut trade deficit with EU and US. So, I don't see any reason why they won't do it.
Inflation Identity is: Price level = ((Money Supply)*(Velocity of Money))/GDP To keep yuan week they would supply yuan to buy the foreign currency, so money supply would increase, but if they get good GDP growth from doing that, it seems that it would keep inflation under control.