Thursday, July 19, 2007

China Overheats

Both second quarter GDP growth and June industrial production and consumer price index for China came in way above analysts expectations. Real GDP growth in the second quarter was 11.9%, with growth likely being especially strong in June as industrial production growth rose to 19.4%. Meanwhile consumer price inflation accelerated to 4.4% with particularly food prices rising fast.

All regular readers of this blog of course knows what I think needs to be done: accelerate the pace of yuan appreciation and preferably stop cold foreign exchange intervention. This would help solve virtually all of their problems: it would ease trade tensions and reduce the excessive trade surpluses and it would also reduce money supply growth which in turn would reduce the problems of overinvestments and rising consumer price inflation. I am somewhat puzzled as to why they don't take such an obviously appropriate action.


Anonymous Anonymous said...

A very good question.

I have one theory to explain this. You see, hundreds of millions of Chinese from the rural areas are involved in export manufacturing.

Many of the Chinese manufacturers are working on razor thin margins. A yuan appreciation will result in many of these margins being wiped out, potentially causing millions to be jobless.

As we all know, the Chinese government prizes social stability above everything else. They wouldn't want to risk it by rocking the boat.

3:37 PM  
Blogger stefankarlsson said...

Well, I've heard of that explanation before. But it really doesn't make any sense because even to the extent it is true that many export companies would be knocked out by yuan appreciation, at least as many domestic will be knocked out by the higher interest rates and reserve requirement increases necessary to prevent overheating in the abscense of yuan appreciation. Not to mention how many
will be knocked out by the higher than necessary oil and commodity prices which the undervalued yuan creates for domestic companies.

6:48 PM  

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