Inflation More Than Washington Behind Yuan’s Rise Against Dollar

When U.S. Treasury Secretary Henry Paulson arrives in Beijing on Wednesday, the Chinese currency might coincidental break through the symbolic seven to the dollar level. As Richard McGregor writes in the FT “the currency has become a litmus test of Chinese responsiveness to U.S. complaints on trade.”

Yet what really is driving the recent strengthening of the yuan — it has risen more than 15% so far this year, more than in the previous two and a half years — is domestic inflation not Washington’s grumbling. Beijing is finding it increasingly difficult to sterilize the economy against the inflationary impact of the foreign exchange reserves piling up because of the trade surplus.

With inflation running at a 12 year high, that has become a more important policy imperative than supporting exporters and inefficient state owned enterprises that are in no fit state to compete against imports. Plus it gets it a few bonus brownie points in Washington — if not Brussels or Tokyo.

2 Comments

Filed under China-U.S., Economy

2 responses to “Inflation More Than Washington Behind Yuan’s Rise Against Dollar

  1. china will export her inflation. no doubt about that. no more cheap countries in the world left to be exploited economically.

  2. China is already exporting her inflation but the measured pace at which Beijing is letting the yuan appreciate, particularly against the dollar is mitigating the effect in the U.S. The dollar peg that held until a couple of years ago was one reason that Americans did not feel the inflationary impact that their weaker currency implied. At the same time, cheap Chinese imports kept the lid on U.S. companies’ ability to raise prices. That is no longer the case, but only slightly so.

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