The low currency value helped export to grow fast. Because the currency is pegged with the US dollar, the central bank has no choice but to accumulate foreign exchange reserve.
What does that mean? Because of high demand of China's goods, the demand for Chinese Yuan is high, naturally. That would put upward pressure on Yuan. In order to keep Yuan low, the central bank has to increase money supply.
That is creating liquidity at home, fueling the out-of-control money supply growth and credit growth, which went into real estate and all sorts of investments.
Increased money supply fueled over-investment, but it is also creating inflation. That's a paradox: if credit growth fueled over-investment, that means there is over-capacity in China, so how could there be inflation at the same time?
Well, over-capacity will result in deflation. That is not a question of how. Rather, it is a question of when.
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