Chinese Yuan (CHY)

A student sent me the following question:
China for some time has undertaken policies to devalue its currency (speculated to be ~15-40%) to maintain its competitive position in regards to pricing of exports. First question is does China use it reserves to maintain this artificial valuation? Secondly, the money expansion in the Chinese economy could have contributed to the free capital bubble of late; is this a reasonable conclusion?


Here is the story: Until recently, all foreign currency collected by Chinese importers had to be converted in the People Bank of China (PBC) into Yuan at a rate that most economists consider as artificially low. This favorable rate made Chinese goods over-competitive in world markets. The undervaluing policy achieved two things:
1. It kept the Chinese economy humming (full employment is extremely important to the Chinese government)
2. It allowed the People Bank to accumulate huge foreign currency reserves that it invested mostly in the U.S. (this serves as a buffer against quick capital outflow from China)
Look at the above graph extracted from Yahoo Finance. As you can see, the yuan (CHY) was convertible at the People Bank at 8.26 CHY/USD for a long period. Starting in mid 1985, due to pressure from the U.S. and Europe, the People Bank started revaluing the yuan (lower number means more value; member this?). So my answer to this student is: yes, China is maintaining its currency on what most economists consider an artificially low level. But no, it does not use its reserves to do so. It actually accumulates reserves in the process.
A note: because the current global crisis brought about a decline in demand for Chinese manufactured goods, the PBC started recently to, again, let the CHY slip in value to increase demand. It is currently trading at about 6.8563 CHY/USD