Is China keeping its currency undervalued a double edged sword for China?
One way to look at it is that China is taxing its citizens in order to keep them employed. By keeping the Rmb low, citizens can buy fewer foreign goods, effectively a tax. But by keeping the Rmb low, it can sell more goods to foreigners, which keeps them employed. The huge risk that China is taking is that the imbalance in payments is forcing them (and other countries) to hold huge amounts of low interest US bonds. If at some point these countries lose confidence in those bonds, there could be a run on the bank in which everyone tries to dump their bonds at the same time. This will cause a huge increase in interest rates, making their bonds nearly worthless.
