Cogito

What does high inflation in China mean to global economy?

Posted in Uncategorized by qmarks on March 12, 2011

Situation:

China has been one of the major driver of global economic growth. But this high growth brought the higher levels of inflation with it.  However, economic growth was not the sole reason for higher inflation, it was also caused by increasing global food and commodity prices, artificially low exchange rates and especially increasing credit supply from Chinese run banks.

Action:

Premier Wen Jiabao, in his speech Saturday to start the National People’s Congress, said the government would “make it our top priority in macroeconomic control to keep overall price levels stable.” He said the government hopes to cap CPI growth for the full year around 4%. That must ring some bells about foreign exporters.

Result, or what to expect:

1) China raised interest rates 3 times since October, also gradually increased the reserve requirement ratio to decrease the money supply. That trend will continue and I expect China to further raise interest rates. Yuan to appreciate because of those rate hikes. The current account may stay in red ink (appreciated Yuan makes imported goods cheaper, and exported goods more expensive). Eventually a cooling down Chinese economy, increased import dependency.

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