Got this from googling "Chinese Currency Manipulation"; just the first hit. This is congressional testimony given by a manafucturing trade group, so it's biased, but frankly I'm no expert on the issue, anyways. The effects are rather complicated (I don't understand them, either), but to summarize, many central banks keep their currency artifically weak and strengthen the dollar because this provides considerable trade benefits; there is a large incentive for money to flow out of the strong currency and into the weak currency, encouraging the massive trade deficits that currently exist. This also results in outsourcing, as not only are wages lower in real terms, but the real value of a dollar spent in China is greater.
Quote:
Chinese exchange rate policy is an important special case which spells currency manipulation in a different way. The Chinese currency has a fixed rate to the dollar but is nonconvertible on capital account. Over the past year, there has been a $25 billion trade surplus, a $45 billion net inflow of foreign direct investment—which also puts upward market pressures on the exchange rate—and over $50 billion of central bank purchases of foreign exchange. In this case, the central bank purchases offset almost three-quarters of market-generated upward pressure on the yuan from the trade surplus and the FDI inflow combined. Moreover, these official foreign exchange purchases may have been even larger except for an unfolding financial scandal involving billions of dollars of missing reserves.[2]
Based on the IMF definition, China has clearly been manipulating its currency for mercantilist purposes. The Bank of China has made protracted large scale purchases of foreign exchange—$150 billion since 1995—in order to maintain a large trade surplus as an offset to poor growth performance in the domestic economy. A direct measure of the manipulation is not possible because of the nonconvertible fixed exchange rate. There is no doubt, however, that if the central bank had not purchased $50 billion in 2001, there would have been strong upward pressures on the yuan in formal and informal markets. The bottom line is that the Chinese yuan is substantially undervalued and should certainly not be devalued as the Chinese government occasionally threatens to do.
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