New Numbers Again Illustrate Foolishness of China's Currency Policy

Chinese GDP growth for the first quarter came in at 11.1%. While that was higher than most so-called professional analysts had expected it was roughly what I had expected. A month ago I said a 12% growth rate would be the result if the trade surplus had increased as fast in March as in January-February. But as the trade surplus actually fell somewhat, a 11% growth rate was more likely.

At the same time, consumer price inflation heated up to 3.3%. That the consumer price inflation rate is so high despite the massive increase in the supply of goods is clearly troublesome, as are the likely high rate of malinvestments. Both are symptoms of excessive money supply growth, which in turn, as Iäve explained repeatedly here, is caused by the irrational refusal of Chinese leaders to allow a significant yuan appreciation, and instead hold the yuan exchange rate down by accumulating massive foreign exchange reserves.

One worrisome sign is the deceleration during the latest month of the rate of yuan depreciation. A month ago, it costed 7.728 yuan to buy a dollar. Yesterday it costed 7.7208 yuan, a appreciation of just 0.1%, much lower than in previous months. Unless the rate of yuan appreciation quickly re-accelerate, China's imbalances will be significantly aggravated, regardless of what other actions (One thing that might work though would be to do away with tax rebates on export companies and/or to reduce import tariffs. That would have a similar effect as a higher exchange rate) the Chinese government use to reduce excesses.