China's Only Real Inflation Solution: Let The Yuan Float

Seeking Alpha ^ | 31 August 2007 | Turley Miller

[shrinkermd]

The Wall Street Journal reported that the CPI in China jumped 5.6% for the month of July. Food prices are mostly to blame with meat products rising 45%. China’s Central Bank has been attempting to head-off inflationary pressures by raising short-term rates for the forth time this year. On August 22nd, the one-year rate banks pay on deposits increased 27bps to 3.60%. The one-year benchmark lending rate was lifted 18bps to 7.02%.

The People’s Bank of China wants to encourage its citizens to park more of their money in deposit savings accounts which has been a tough sell due to negative real deposit rates (stated interest - inflation). Inflation fears prompt citizens to increase present spending because postponement leads to a loss of purchase power.

Raising rates will not curb China’s inflation problem. China’s currency is way too undervalued and that is the primary force driving up consumer prices. A cheap Yuan makes Chinese goods cheap relative to the rest of the world. Cash has been pouring into China’s economy due to the huge demand for their inexpensive goods. That increases China’s money supply, thus fuels inflation. If the Chinese government would let their currency float, then natural economic forces would resolve the problem. Demand for Chinese goods means demand for their currency which would cause the Yuan to appreciate and subsequently slow the demand for their exports. Yet, the currency is fixed at an artificial exchange rate thus hoards of trade dollars continue to flow into China with no end in sight

[shrinkermd]

Mercantilism to be successful and to continue in a fiat currency environment requires a strong and consistent efforts to cheapen the currency. Japan is the best example; however, sooner or later (even for Japan) the economy corrects for these manipulations one way or the other.

Presently, China believes the path to success lies in exporting more than they import. Every nation's dream but every citizen's nightmare.

[rightwingextremist1776]

The reality of market economics...not even commies can hide from it.

[Moonman62]

Presently, China believes the path to success lies in exporting more than they import.

Every politician in the world loves exports and a weak currency. It must be a collective brain tumor they all share.

But it is good to see an article that's gets the cause of inflation correct, rather than the usual and incorrect scapegoat of economic growth.

[az_gila]

IIRC correctly, wasn’t floating their currency a requirement to joining the WTO?

Can someone confirm this?

[Onelifetogive]

Every nation's dream but every citizen's nightmare.

I had an MBA prof who said that a trade deficit is a great thing. We put some green ink on paper and they give us TVs for them...