As Obama makes his way through Asia, there is a lot of talk about chinese economic policy, and rightly so. For the last year and a half, China has resumed their policy of pegging the yuan to the US dollar (see chart) despite the massive trade surpluses, thereby thwarting the natural tendency of the dollar to weaken against the yuan. Allowing the dollar to weaken would cause chinese product pricing to increase in USD, reducing US demand for chinese goods .... at the same time, it would devalue the US debt that China currently holds.
This LINK shows a good basic analysis of the Chinese strategy to peg the yuan to the US Dollar (keeping the exchange rate constant). It also includes an ill-constructed gametable showing the payoffs of the players, but what do you expect from NYU guys.
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