Tuesday, July 8, 2008

Orient Depress

I've said for a while that to keep net exports in surplus, China would have to do some pretty crazy things to keep from accumulating stockpiles of undervalued dollars and prevent speculation on the fixed yuan. Inflows of paper currency recently surpassed FDI inflows as the main offsetting factor to China's Current Account (trade) surplus. Here's some recent evidence.

So, basically they're: (1) forcing banks to hold almost twice their usual reserves, in dollars so that the CB doesn't pile them up (contractionary), and; (2) print more yuan to meet demand and curb speculation (expansionary/inflationary). Add fuel prices and price controls into the mix, and we've got a nice recipe for stagflation.

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