For years on both sides of the great partisan divide, manufacturing as well as some members of Congress have been asking the administration to do something about China's currency manipulation. The Bush administration refused. See Geithner's answer on China's currency manipulation during the confirmation hearings:
President Obama -- backed by the conclusions of a broad range of economists -- believes that China is manipulating its currency. The new economic team will forge an integrated strategy on how best to achieve currency realignment in the current economic environment.
So, why is this important? It's a legal issue. If the Obama administration will categorize China as a currency manipulator, there is the start of recourse. Even more significant, Obama cosponsored a bill which would have given those affected by China's currency manipulation the ability to file for import tariffs per a specific product against China.
The problem is China holds over $1 trillion in U.S. debt:
In the last five years, China has spent as much as one-seventh of its entire economic output buying foreign debt, mostly American. In September, it surpassed Japan as the largest overseas holder of Treasuries.
So, what happens to U.S. bonds, debt if the Chinese yuan is allowed to rise to true market value?
It seems China has a vested interest in that not happening, all due to trade and exchange rates:
Two officials of the People’s Bank of China, the nation’s central bank, said in separate interviews that the government still had enough money available to buy dollars to prevent China’s currency, the yuan, from rising. A stronger yuan would make Chinese exports less competitive.
For a combination of financial and political reasons, the decline in China’s purchases of dollar-denominated assets may be less steep than the overall decline in its purchases of foreign assets.
Many Chinese companies are keeping more of their dollar revenue overseas instead of bringing it home and converting it into yuan to deposit in Chinese banks.
So, what happens? Manufacture This has some insight:
While an artificially low Yuan has helped China become the world’s fastest growing economy in recent years—and a manufacturing juggernaut—such a meteoric rise has also sewn the proverbial whirlwind. Economic problems like rising energy costs, constraints on agricultural production, lagging rural incomes, and troubled global financial markets mean that, more than ever, China wants to keep its export engines running full tilt. But maintaining a low Yuan is starting to bite hard, especially with higher oil prices.
It seems that Beijing is hitting a wall—damned if they do, damned if they don’t. And so, while Congress frets and fractures over whether to take action on China’s undervalued currency, it’s quite possible that inside Beijing’s ruling regime, the same currency debate is taking place.
In the meantime, U.S. manufacturers continue to take a double beating, both from climbing energy prices and competition from China’s undervalued goods.