Dealbook reports that China is worried about inflation, what with its booming economy and all that, so it wants to cool things down. Wonks Anonymous quotes extensively because the story contains a rather good description of the currency policy called sterilization:

Central banks around the world have a history of taking small steps at first when they begin raising interest rates after a long period of keeping them low in response to an economic downturn. Because China does not have a well-developed bond trading market, the yields on the weekly sales of central bank bills are widely watched as a barometer of the central bank’s intentions.

The central bank sells its bills mainly to banks, which pay renminbi that the central bank then effectively takes out of circulation, slowing growth in the country’s money supply.

Weekly sales of central bank bills are part of a process that economists describe as “sterilization” of China’s massive intervention in currency markets.

As U.S. dollars and other foreign currencies pour into China from its trade surplus and foreign investment, the central bank prints vast sums of renminbi and issues them to buy these dollars and other currencies.

To prevent all those extra renminbi from feeding inflation, the central bank then claws back the renminbi from the market through a series of measures that include the sale of central bank bills. China also requires commercial banks to keep large reserves on deposit at the central bank, partly to keep the banks from lending too recklessly but also so that the central bank can use this money to finance further purchases of dollars and other foreign exchange.

Now the concluding two sentences. The first is a simple statement of fact. The second starts out well but the last phrase, in bold, is utter nonsense.

The goal of sterilization is to keep inflation under control in China while keeping the renminbi weak. This helps make China’s exports competitive overseas and preserves jobs in China.

Inflation, which is too much money chasing too few goods, can be solved either by reducing the supply of money - the Chinese ruling classes have chosen this route - or by increasing the supply of goods.

Now the artificially high value of the Chinese currency acts to reduce the supply of goods by drawing the output of China's factories into export markets where it is sold at deep discounts. At the same time the low value of the Chinese currency assures that imports will be sold at high prices.

China could easily get more goods by raising the value of its currency. Domestic producers would divert output to home markets and the more valuable currency could be used to buy imports.

The only problem with this is that the real wage of Chinese workers would rise. Ordinary Chinese people workers and farmers would have more consumer and capital goods at their disposal. This would tend to reduce the power and profits the ruling classes.

It would also probably speed the development of a balanced economy that worked to fill human needs rather than commissars pockets.