The Curious Capitalist blog at Time.com has an informative article on why China continues to control the exchange rate for it’s currency, the Chinese Yuan. The country’s leaders have continued to keep the exchange rate low relative to other major currencies despite the growing protests of the U.S., the Eurozone and Japan that it undermines their competitiveness.

 In order for China to keep the exchange rate between the Yuan and the U.S. dollar low it must purchase large quantities of U.S. dollars. As of September 2010 China had a currency reserve of $2.65 trillion. 

The typical reason given for China’s reliance on this policy is that it helps the exporters of the country. If the Chinese Yuan is “cheap” then the goods exported from China are more completive with other foreign goods. This policy is likened by the author to short term thinking at the expense of the long term. So long as this policy remains in place it will be difficult for the Chinese Yuan “to become a major force in world of trade and finance.” 

So, why else would China continue to control the value of the Yuan? The Curious Capitalist surmises:

(1) China is still really really poor;

(2) Alleviating that poverty is the sole basis for the legitimacy of the ruling regime; and

(3) Chinese leaders are thus terribly afraid of their own, restive populace.

We forget amid all of the China-is-taking-over-the-world talk that it’s still way way way behind the advanced economies of the West. Sure, China is now the second largest economy in the world, but with the world’s largest population (1.3 billion) that doesn’t add up to very much per person. China’s GDP per capita in 2009 was only $3,735, compared to $45,934 in the United States, according to IMF data. China is even poorer by the standards of other emerging markets. Brazil’s per capita GDP is more than twice as large; so is Mexico’s.