Thanks to Krugman, I see that China is the blog topic of the day.
Yglesias takes issue w/ Krugman, saying that the US should adopt looser policy to get a different currency alignment. However, due to capital controls, this wouldn't happen automatically, but rather, if the Fed did *way* more QE, and the dollar declined dramatically, it would put pressure on the Chinese to seek a higher revaluation. (Partly b/c Europe and other countries would put more pressure on the Chinese...)
My two cents about the issue is that China's policy, of piling up massive reserves and undervaluing its currency, is extremely smart industrial policy. Any trade model of increasing/dynamic returns will yield the conclusion that John Stuart Mill/Hamiltonian infant industry protection is a good idea for developing countries (and this also happens to be what the data say. My only problem w/ Rodrik's paper is that he somehow missed the infant industry argument... but i digress) And anyone who was around during the Asian Financial Crisis knows that having a mountain of US Treasuries can be of help in a pinch.
Despite the above logic, however, Larry Summers is on record calling Chinese currency manipulation "stupid". Hopefully, he realizes that, in reality, it isn't stupid, and second, that this is something the US should fight.
OK, back to research...