Why China should stop piling up dollars (and why it won't)

Nice observation Justin, but "not so fast!"
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China really doesn't care about the revaluation of the Yuan. They are advancing and supporting that alternative pragmatic argument because the real reason would spook the world markets and investors.
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China has a population of at least 1 billion (probably much more) and yet they maintain a growth rate of 8% y-o-y since 1978. How is that possible?
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SImple. The 8% growth rate is a lie. (Thanks Joe Wilson.)
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The primary job of the Chinese politicians is to stay in power and find jobs for so many people while transitioning from a communist economic policy structure to a capitalist economic structure. The justification that Japan had a lost decade is a red herring.
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The Chinese know that the real reason is that propping up the Yuan gives their manufacturers an inherent competitive advantage without being forced to yield Smoot-Hawley like tariffs which would send the U.S. and thus, the enitire world including Chine into a second global depresssion. That is the real motivation here and the 800 pound gorilla in the room that no one wants to talk about.

[...] 2.) Why China should stop piling up dollars (and why it won’t). [...]

@bryan: Do you have evidence that China's 8% growth rate is a lie, other than it seems improbable? And do you really believe that the Chinese are propping up the yuan? Or that propping up the yuan would give Chinese manufacturers an advantage? If you mean that the Chinese are artificially holding down the exchange rate of yuans, I agree with you. I think China needs to do so, as I believe you imply, to provide employment to its growing workforce. The process will probably continue till China can transition from a predominantly export oriented economy to one that is more oriented toward domestic consumption.

Don't you miss Brad Setser's blog?

Pneogy,
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All good questions. Let's take each in turn.
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China's 8% growth rate
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We know this is false because of simple arithmetic. Let's examine the unemployment rate for a country with 8% y-o-y GDP growth and what do you find?
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http://www.indexmundi.com/china/unemployment_rate.html
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It is remarkably step-like for a country that has a 1 child per family policy. No, I am pretty sure that the Chinese government is making up these numbers out of whole cloth.
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Propping up the yen by buying loads of US treasury issues and giving their manufacturers an implied competitive advantage....this is too easy.
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Yes, I think this is just pretty much common sense.
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The Chinese (it is widely known) hold about $2 Trillion of our debt. Further, (widely known) the fact is that the dollar is pegged to a Chinese yuan to completely hold both currency investors and speculators at bay.
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It is additionally (widely known- meaning google with generate at least 15-20 hits and probably more) interesting that every economist in the world acknowledges that the yuan is probably undervalued and the effect it has on trade imbalances with the U.S. and Europe.

[...] In order for the Fed to actually be able to fully use monetary policy to keep the economy humming at full throttle, we need financial regulation (to avoid new liquidity being channeled into bubbles instead of real investment), better capital asset ratios (to help moderate moral hazard and asymmetric risk), and limited expectations of future dollar devaluation (which currently result from our huge debts, and China’s continued mercantilist policies that keep the dollar propped up). This latter point is not entirely intuitive, and I might argue that the best way to avoid future expectations of devaluation is get the Renminbi/Yuan revaluation (which everyone expects, but over which there is massive uncertainty) over and done with. China, however, is not too keen on this idea. [...]