How can China afford to keep its currency low?

If the demand for currency is high, its value appreciates. Demand for Chinese currency is high because it's a net exporter. Yet how can they take the hit? Secondly what is the source of funds that China invests so heavily in infrastructure and manage to keep the labour,land and interest rate so low?|||(1) China has currency controls. It isn't as if anyone who wanted to can go to China, bring in dollars, and buy yuan; similarly, Chinese aren't free to use their yuan to buy dollars.





(2) China keeps the value of the yuan from appreciating by increasing supplies - it creates yuan and uses them to buy U.S. dollars in order to keep the dollar/yuan ration approximately constant (an informal but real peg to the dollar)


http://www.nytimes.com/2010/01/01/opinio鈥?/a>





(3) China gets the money from its own people. The people as a whole are subsidizing the export industries. Personal consumption is around 35% of GDP, about half that in the U.S.


http://delong.typepad.com/egregious_mode鈥?/a>





(4) Labor, land, and interest rates are NOT low.





If labor were still cheap, these export subsidies would not be needed. Chinese industry could compete without them. But because of the success and growth of the economy, wages have gone up faster than productivity, so without the subsidies, many industries would move elsewhere.


http://www.csmonitor.com/World/Asia-Paci鈥?/a>





Land costs are rising so fast that most people see it as a bubble:


http://www.spiegel.de/international/worl鈥?/a>





And while the benchmark interest rate in the U.S. is under 0.5%, that in China is now over 5.5%


http://www.tradingeconomics.com/





It helps to get your facts straight.|||If the demand is high but the spending is high also, the value will either stay the same or lower.





In a sense, you have answered your own question:





Since demand is high for the yuan, the value should go up but, along with other methods, the Chinese are selling their currency below market value and spending it like it grows on trees. The infrastructure spending is massive as well as the purchasing of foreign debt, like the U.S.





They are also doing a bit of what the Japanese did in the 80's and guess what happened to the Japanese in the 90's?





In basic terms, currency is valued off of demand and supply. Demand drives the price up, but over supply will drive the price down. This is the major issue with the Chinese, that they do not allow equilibrium with their currency. If inflation is not allowed, then at some point the economy will pay for it. Another point is: Does the government give full reports on borrowing or spending? No.|||govmnt