When the People's Bank of China purchases dollars or sterling -- and simultaneously sells Chinese yuan -- the demand for the U.S. dollar and British pound increases and they grow in relative strength. Since the yuan is being sold, its value decreases and it can be maintained at an artificially low exchange-rate value.
The Chinese government can influence exchange rates by mandating policy for all foreign money exchanged in China. Some estimates peg the Chinese foreign exchange reserves at $3.5 trillion. This helps China to keep its own currency value depressed.
In China, it is the capital account surplus of foreign direct investment that keeps the country in the black. In a free-market system, the renminbi would appreciate sharply against other currencies.
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