in China ,
Let's set the scene. After the 97 Asian economic crisis, a conclusion was reached that massive cash reserves were the way to avoid economic crisis. So the CCP had both the mainland and HK run up huge cash reserves. On the mainland this was driven primarily by running a massive trade imbalance with the US and EU. The trade imbalance was loved by Alan Greenspan and George W Bush as it allowed a way to drain inflationary cash out of the country at a time of a massive asset inflation bubble and meant that the CCP had the cash to buy US government assets that would fund George W Bush's off-the-books War on Terra/Afghanistan/Iraq.
Then came Lehman Brothers. The collapse of financial institutions and the asset inflation Ponzi scams in the US and EU meant a lot of deleveraging happened and cash vanished into nothingness. The cash that was driving the consumer-side of the trade imbalance disappeared and PRC exports plummeted. This kicked the legs out from under the CCP's growth plans.
The CCP's response was a huge prolonged Keynesian cash dump. Driven by an ideology that says infrastructure investment always produces huge ROI, cash was dumped on infrastructure projects of the 'build it and they will come' variety. Early on it was apparent that most of this would be nearly useless with no positive ROI. The cash also proved inflationary and property asset inflation was set in motion creating the PRC's own property bubble. The CCP, like Team CronY in HK, have slowed the bubble, but never popped it. The powers-that-be hoped that enough cash could be created to inflate incomes to catch up with asset prices.
As the big cash on quick flips in property slowed, the cash needed to flow somewhere else. That somewhere was into the stock market and bonds. Asset inflation kicked in and the CCP's mass line to buy stocks to refinance SoE debt, relaxation of rules on margin buying and distaste for moral hazard meant massive asset inflation disconnected from all underlying business indicators.
This lasted until someone noticed the disconnect (my goodness, the Emperor has no clothes) and PRC stocks started collapsing. Cash, lots and lots of cash, was needed to prop up the vision of mass line infallibility. Although prices seem to stable for the moment (?perhaps due to nearly all stocks now being owned state agencies?), confidence in the stock market doesn't seem to have returned. Money is fleeing back to property (reinflate the bubble!) or fleeing the PRC completely. The last quarter or two have seen big sales by the CCP of US dollar assets apparently to cover for these outflows.
So how do you balance the cash outflows if not by selling off foreign reserves? Oh yeah, the geniuses of the CCP leadership thought long, hard, and ultra-creatively and came up with 'trade imbalances'. It used to work in the time of asset-inflation-driven demand bubbles in the US/EU. And then the geniuses of the CCP leadership thought long, hard, and ultra-creatively about how to best create 'trade imbalances' and came up with 'devalue the currency'.
Of course the CCP's marketing department was busy listening to foreigners' hopes for the PRC economy. How do we sell this devaluation to create trade imbalances to make the IMF and friends love us? They want the pricing of the RMB to be market driven, so we'll say the CCP policy is exactly what they want to hear so the gullible can be happy. And the gullible will sing the hallelujahs of the genius CCP leadership pushing forward with market reforms.