Chinese Leaders Finally Getting It?
Still, until recently they've mainly tried to reduce inflation by the for China less effective means of raising interest rates and raising bank reserve requirements. These measures is much less effective than allowing the yuan to rise and comes at a very high cost for China. But recently the rate of gains have sharply accelerated. In the latest month (January 17 2008 compared to December 17 2007), the yuan rose from 7.3805 per dollar to 7.2245 per dollar. That's a 2.1% gain in a month, which translate into an annual rate of more than 29%.
I find it unlikely that they will keep up this pace for much longer, but it seems clear that they will raise the rate of yuan appreciation versus the dollar to much higher levels than in 2007. This is good news for China-but it will mean that the price inflation problem in America will become even greater. Not only will this further boost the boom in commodity prices in dollar terms, it will make the price of imported goods from China much higher. In the past, import prices from China were generally falling but the high rate of inflation in China combined with the higher yuan have already started to raise import prices from China, and with the accelerated pace of yuan appreciation import prices from China will likely rise even faster in the future.