“China pegs the value of the yuan to the US dollar. By stockpiling dollars it raises the dollar value versus the yuan thereby increasing sales by making Chinese exports cheaper than American-made goods.” But why exactly does stockpiling dollars raise the dollar value versus the yuan? Why does it make the yuan less?
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When someone buys a Chinese made good, they send dollars to a business in China. That business doesn’t want dollars it wants yuan to pay its employees and suppliers. So it sells dollars and buys Yuan. That over time should lower the price of the dollar relative to the yuan, but the Chinese central bank buys dollars and sells yuan raising the price of the dollar and lowering the price of the yuan.
This means the central bank piles up dollars it can’t sell, which usually are invested in dollar assets like bonds or real estate or equities.
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