But one thing China can not turn away from is the effect of its yuan/dollar peg on domestic prices. "China is learning that the dollar peg is a two-edged sword," economist David H. Wang told BloggingStocks. Wang was born and lived in China for more than 20 years before leaving for graduate school in the United States; he continues to study China's economy.

"On the one hand, China has had the benefit of large export sales of low-cost goods driven by the dollar peg. On the other hand, China is learning that when you tie your currency to the dollar, if the dollar depreciates, the price of everything you buy increases," Wang said. "And that's feeding China's inflation, and making it hard for government officials to contain it."

Italian suits, French wine: costlier

For example, if someone in China wanted to buy an imported Italian suit priced at 500 euros in 2001, he would have had to pay $450. Today in 2008, that suit would cost about $735. A fine French wine priced at 40 euros would have cost $36 in 2001, and $58 today.

Wang said China's government estimates that consumer prices rose around 5% in 2007, but actual inflation is probably 6-7%, which is too high. China has instituted a series of interest rate increases and other lending restrictions to lower inflation, with only modest results.

"China's officials are learning that no matter what they do from an interest rate standpoint, if they maintain the peg, and the dollar depreciates, that forces the price of goods and services up in China," Wang said. "If a Chinese company buys tires wholesale from Europe, and the dollar depreciates 10%, the price of those tires just went up. Rationally, that company, like most, will try to recoup that additional cost by increasing the price of those tires at its auto service centers in China, and that's what's contributing to inflation."

Calling the kettle black

Independent currency trader Andrew Resnick said recent rumblings from China complaining about a weak dollar strike the markets as "somewhat philosophically inconsistent and weak."

"China has complained recently about the falling dollar, because it's affecting their inflation," Resnick said. "Well then, we have to ask ourselves, why is the dollar weak? One reason is the U.S.'s trade deficit. Why does the U.S. have a trade deficit? In part because of the flood of low-cost Chinese goods, goods whose price is artificially low, due to the artificially low yuan and its peg to the dollar. So one major reason the dollar is weak is China's currency policy itself, which means the inflation they complain about is partially their own making."

Resnick added that the problem will begin to correct itself when China moves to a more market-based currency rate system. "The artificially low yuan is not only boosting China's inflation, it's at the core of other imbalances in the global markets today," Resnick said. He added that if the yuan were allowed to freely float, "it would probably appreciate to 5 yuan to the dollar or 4.5 yuan to the dollar."

Wang, like most analysts, said there is no chance that China's government will allow the yuan to float freely anytime soon, nor let the yuan appreciate even 20% or 30% in one year. Due to the impact of currency appreciation on exports, the government will most likely stick with a modest 3-6% yuan appreciation per year, Wang said.

"But China is learning that the dollar peg is no free lunch. There are negative consequences and costs when you attempt to divorce a currency's value from economic and financial fundamentals," Wang said. "And this, I am confident, will lead China to implement a more market-based currency rate system down the road."