Wed 30 Sep, 2015 04:35 am
Recently I learned that China's purchases of U.S. Treasury securities are a method of keeping the Yuan weak relative to the USD:
"China will continue to buy Treasury bonds as long as they want to keep the yuan's value lower to support exports" (from the Wall Street Journal).
What I don't understand is how buying USD denominated assets either drives down the Yuan or drives up the USD.
By using dollars accumulated through a trade surplus to purchase Treasury securities, the Chinese government takes dollars from its central bank (where those dollars were effectively removed from the market) and gives them to the US government, which spends them domestically, thus putting those dollars back into circulation. This would increase the supply of dollars which should in turn tend to weaken the dollar, not strengthen it.
I can see how simply printing a bunch of Yuan then using them to buy dollars would increase the supply of Yuan and thus weaken it, but don't see why the additional step of using those dollars to buy US treasuries is necessary or how that additional step either weakens the Yuan or strengthens the USD.