The central bank dominates trading of the renminbi through heavy intervention in the Shanghai market, selling renminbi heavily and buying U.S. dollars so as to prevent China's trade surpluses and inflows of foreign investment from pushing up the value of the renminbi.
China holds $1 trillion in United States government debt, and that is but half the foreign reserves generated by its huge trade surplus and investment inflows.
Britain's public finances are highly seasonal, and July typically shows a surplus because of inflows of income tax and corporate tax payments.
The adjustment is made easier by a parallel process in the surplus economy; gold inflows allow an expansion of the monetary supply and inflation, which reduces competitiveness and stems the gold inflow.There is a potential problem in this dynamic, however.
The Chinese government has been issuing vast sums of Chinese currency each week so as to buy up dollars from the country's trade surplus and investment inflows, while Chinese banks have been lending aggressively, creating a surge in circulating money.
But for a long as the trade surplus and investment inflows continue at the pace they have been, and China doesn't allow a rapid revaluation of the yuan to help take the strain (which it won't because it would be so disruptive to the economies of inland China), its central bankers will be pushing a rock uphill.
The upgrade, Fitch said, reflected a persistent current account surplus, underpinned by remittance inflows, while a "strong policy-making framework" — notably effective inflation management by the central bank — has supported the overall economy in recent years.
In the past, when foreign cash streamed into China via its trade surplus and amid speculative inflows, the central bank printed billions of yuan every month to soak up the flood.
The task confronting China's central bank is straightforward to frame: for the past five years $1 billion a week has flooded into the country from China's record trade surplus and foreign investment inflows.
