Friday, June 27, 2008

Hot China

Naked Capitalism has a post linking to a bunch of the other stuff I've already read about China, conveniently allowing me to forgoe collecting it all in one place myself (though if the topic really interests you, a stop by Brad Sester's blog is a must).

To summarize: China's FX reserves are growing much faster than their current account surplus, probably as a result of people speculating on the appreciation of the currency. This puts China between a rock and a hard place, because if they continue to let this money come into the country they will inevitably end up with higher inflation, at a time when it is already menacing. However, if they revalue the currency they lose on export competitiveness at precisely the moment that their major buyers' (US, Europe) economies are going into the tank. This would be a serious problem for what continues to be an export-led economy. Finally, the intermediate route, of accepting some inflation, but also partially revaluing, actually makes the problem worse, as now everyone with half a brain will try to make the same bet on their currency gradually appreciating, it being one of the few predictable investments I can think of right now.

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