First of all, the overvaluation of the local currency exchange rate means that the apparent purchasing power of the local currency is higher than its actual purchasing power. For example, assuming that the local currency is RMB, the exchange rate of the US dollar against RMB should be 1:5, which is relatively normal. However, due to various factors, the actual situation is 1: 1 (the United States has always thought so), and foreign currency holders expect the exchange rate to return to 1:5, waiting for the price, or even increasing their holdings. RMB holders need to convert RMB into foreign currency (such as USD) for import, preservation and appreciation (as expected), and the demand for foreign exchange increases. The deficit is easy to explain.

Second, taking the US dollar and RMB as examples, China's surplus will increase the US dollar held by China. Since the monetary control authorities of any country will not allow a large amount of foreign exchange to flow in their own countries, the inflow of US dollars needs to be converted into RMB in the international foreign exchange market (the main way). At the same time, due to the outflow of domestic currency (US dollars), the US authorities need to exchange US dollars in order to maintain the balance of the domestic market. At the same time, China, which sells dollars in the foreign exchange market, needs RMB, while the United States only pays in RMB, so the demand for RMB in the United States increases. Demand for RMB increased, supply was less than demand, and exchange rate rose.

We'll discuss it when there are problems.