China refuses to let their currency float on the open market, basically pegging their Yuan to our Dollar, it makes Chinese products cheaper to American consumers. Therefore cheaper products mean larger trade deficits with the United States.

Larger trade deficits mean they have more U.S. dollars to play with. Right now they are using that currency to buy our bonds, keeping our interest rates low and keeping our economy going.

If the American dollar is devalued, that is good because American products will become cheaper overseas and thus foreigners will buy more American products.

Because their trade deficit is so large with the United States, they really have no where else to put their American dollars, but to buy our bonds because they are surely not buying our products.

China keeping its currency low artifically keeps their products cheap to foreigners, the problem is that they have ALOT of growth - 10% last year and this is causing inflation in their economy.

They are trying a managed capitalism approach, which even they are having a problem holding the reigns on their hot economy.

Remember also that China does not allow foreign companies to take more than 10-20% of their profits out of the country - therefore they are forced to invest back into their country. Unlike in the United States you can be British, buy an American company and take ALL your profits overseas (minus some taxes of course).

I suspect interests rates in China will have to go up to slow their economy.