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This story–China’s growth accelerates to 10.7 percent in 4Q–creates some curious reactions in world markets. Asian stock indexes went down, and the US dollar rose to a five-year high. The funny part is that the good news also brought renewed expectations that China would raise interest rates and tighten money supply growth. Inflation is feared, apparantly more than a reduction in the rate of growth.

Strong Chinese growth could help to drive a global recovery by boosting demand for foreign oil, consumer goods and other imports. It also might give Beijing confidence to ease currency controls and allow its yuan to rise against the dollar, which could boost imports by making them cheaper for its consumers. China has kept the yuan steady against the dollar since late 2008 to keep its exporters competitive abroad.

But that progress could be derailed if a burst of inflation saps the spending power of Chinese families and forces the government to clamp down so severely on credit and investment that it slows the creation of new jobs.

So the expected increase in interest rates explains the lower spending expectations in the rest of Asia, but that would normally make the currency stronger against the dollar. Must be that the “confidence to ease currency controls,” is seen as a stronger influence.

Myself? I doubt it. For years China has been able to keep the Yuan relatively low through currency purchases, and still manage inflation domestically. Like mentioned later in the article, most of China is still a developing country.

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One Comment

  1. Keeping inflation rate positive but low is the goal for the governments.The negative consequences of high inflation include less of purchasing power(because the average price level increases, so there’s a decrease in real income),effect on international competiveness(expoets becaomes less competitive) and labor unrest(workers wants to increase their income, so high inflation can lead to disputes between unions and management.)
    How to control inflation rate at a lower level? Government can use deflationary fiscal policy or deflationary monetary policy(like China). Chinese government decides to increase interest rates to reduce money supply. Another method is to set an explicit or informal target rate of inflation that can result in a reduction in inflationary expectations.


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