Tuesday, November 02, 2010

The paper dragon is printing paper...

...as I have stated here previously, the dangers of cost-push inflation in China is making Yuan appreciation impossible to accomplish. Control is slipping away.

Though inflation exists in China, rarely will an official warn the public to expect it to continue.

A member of the Chinese National Development and Reform Commission recently spoke anonymously to domestic media, saying that further interest rate increases will not control inflation so the public must simply be resigned to it, according to Deutsche Welle.

Subsequently, many media outlets, including China's state-run Xinhua News Agency, reported numerous responses from Internet users. The public decried the NDRC’s warning as illogical.

A continuous political signal, intent on stability and the suppression of discontent, is being sent: Endure the inflation because there is no way out.

As Markus Taube, director of East Asian Studies at the University of Duisburg-Essen, explained to Deutsche Welle, stability requires that inflation be controlled; had there been no inflation at the end of 1988, the bloodshed during 1989 might have been avoided.

Since then, the Chinese regime has been alert to the threat inflation poses to stability, and is now admitting openly that interest rates cannot stop rising prices. Some bloggers are actively suspecting a replay of the “Jin Yuanjuan” era (a currency that lasted only 10 months and depreciated more than 20,000 times its face value) during the late 1940s.

Taube says that the simplest way to relieve inflation is to allow the renminbi to appreciate, avoiding international currency speculation, encouraging investment into China, and increasing both the circulation of currency and the pressure on inflation.

But the consequence is that currency appreciation will seriously affect export costs and lead to a chain reaction from the public—something the Chinese regime would rather avoid.

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