Mr. Krugman forgot to mention that by keeping the yuan pegged to the dollar, the Chinese have allowed Americans to live well beyond our means.
The exchange rate of its currency, the yuan, pegged to the dollar at an artificially low level, has become a big issue in the world economy.
China's central bank has kept the yuan pegged at 8.28 to the dollar by printing hundreds of billions of yuan to buy the tens of billions of dollars a year now flowing into the country each year.
MANY policymakers and economists argue that the Chinese yuan, pegged for a decade at 8.28 to the dollar, is grossly undervalued, and that a revaluation is essential to reduce America's huge current-account deficit.
The Chinese government is willing to incur these losses, however, because by buying US government bonds, it bids the value of the dollar back up so that China can maintain its dollar-yuan peg.
That cannot happen, however, until the banking system is in better shape.Many foreign economists argue that in the meantime the government should revalue the yuan's peg, widen its trading band or shift from a dollar peg to a basket of currencies.
The talks in Beijing on Oct. 16 and 17 are expected to determine whether the Bush administration brands China a currency manipulator in a coming report, despite a decision by Beijing in July to relax the yuan's peg to the dollar.
(In theory, the yuan is pegged to a larger basket of currencies, but in practice, it's been pegged to the dollar).
The yuan is pegged artificially low against the dollar, enabling America to suck in cheap Chinese goods.
While the yuan remains pegged to the dollar, the People's Bank can do little about monetary conditions.
On Tuesday, the United States Treasury made the most stinging official attack so far on China's foreign exchange policy in a report that warned China to revalue its yuan -- pegged at 8.28 to the dollar.
