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China jump-starting Inflation?

April 10th, 2010 by Syed Husain · 1 Comment · Residency 4: Shanghai

The next two weeks will be a very interesting time to be in China. The chairman of the Fed recently met up with the Chinese Vice Premier Wang Qishan to discuss the issue of letting the Yuan float. The Chinese government may or may not allow this to happen. If it does happen, it is difficult to say what the full implications may be and this will make it a very exciting time for us to be visiting the country as MBA students. Even if doesn’t happen while we are there it will still be interesting to see how the country is preparing for it to happen eventually. The price of raw material acquired from outside China will probably drop but the price of it’s exports will rise. What happens to the price of goods inside China? What happens to the price of the suits we are all planning to have tailored in Shanghai?

A common consensus among economists is that the Yuan is undervalued and a stronger Yuan may cause inflation in the rest of the world, seeing as how China is a big exporter of goods to a lot of countries. Inflation is probably considered a good thing for countries looking to jump start their inflationary cycle. I know that the Federal Reserve is worried about deflationary forces currently present in the U.S economy and maybe this is a good way to counteract that concern. I know Greece would love to see inflation ease some of it’s debt burden but I’m not entirely sure how that works completely.

I was wondering about the other implications of the revaluation of the Chinese currency, could this signal a trend towards further reform in China? Can we see that bump in the road (democracy) more clearly now? All of this is of course just speculation on my part and none of this is certain but I know one thing, I’m going to buying Yuan while I’m in China.

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Tags: China·Currency·Economics

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  • Randy Zwitch

    Interesting thought Syed. Certainly, the economics of changing valuation of currency is relatively well known, but what it would mean for the world for a country as large as China to do it has maybe not been seen.

    I could see China nominally allowing the Yuan to appreciate, but I don’t see a full ‘float’ in their future. There’s just way too much money to be made on the export side to allow a truly floating Yuan.

    Of course, if the U.S. stopped issuing so much debt, China wouldn’t be able to maintain their current strategy; as I understand it (or, think I remember it), China is able to revalue their currency by requiring Chinese exporters to convert their Dollars to Yuan. The Chinese government can then buy U.S. debt, rather than goods from the U.S., and thus doesn’t give any boost to the Net Export side of the GDP equation.

    But the likelihood that the U.S. government will stop spending money we don’t have, is about as likely as the Chinese government deciding to revalue their currency to be less competitive. What a tangled web we weave!


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