We have previously blogged on the dispute between China and the rest of the world regarding the pegged value of the yuan. In short, China refuses to let the yuan rise to it's equilibrium value. By keeping their currency artificially low, they encourage exports and discourage imports. The U.S. has tried to get China to abandon this policy to no avail. In the last month, the Federal Reserve in the U.S. has undertaken a policy of quantitative easing - increasing the money supply. The result is a decline in the value of the US dollar against most other currencies and gold prices hitting record highs (in US dollars).
You can't blame us for being a little surprised that China would actually criticize the US for actively depreciating the dollar given that the yuan has been undervalued for years. (Click here for article) China argues that the quantitative easing will lead to inflation and upward pressure on the yuan. The only way that China can maintain the relative price advantage is to continuously purchase the US dollar and issue yuan. The result of this action, as we previously explained, is inflation in China.
The depreciation is starting to spread. Brazil, Indonesia and Japan have already started to impliment policies to lower their currencies. Looks like we may have a race to the bottom. The first one with a valueless currency wins.
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