The Not So Brilliant Chinese Leaders
At the same time, growth in domestic demand seems to be picking up as retail sales grew at a record 22% rate in nominal terms. The combined effect of the negative supply shock and rising growth in domestic demand is that price inflation will likely stay high. To combat this, Chinese leaders are mainly relying on raising bank reserve requirements.
At the same time, Chinese leaders are noting the conflict between on the one hand reducing demand to reduce inflation and on the other hand boosting consumer demand to reduce dependence on exports. To quote People's Bank of China leader Zhou Xiaochuan:
"On the one hand, we need to boost consumption to adjust the economic growth structure, but on the other hand we also need to prevent excessive demand from fueling inflation."
It seems that Zhou must have failed his international economics class. There is in fact one way of solving this apparent conflict, one way to increase consumer demand without increasing overall demand. Namely, to let your currency rise in value. That will boost consumer purchasing power and so help rebalance the Chinese economy, while not increasing overall demand as it reduces net exports. But after accelerating the rate of appreciation earlier in the year, the yuan appreciation has stalled in recent weeks. Chinese leaders should again accelerate the rate of appreciation (or better yet make a really big one off revaluation, or even better, allow the yuan to float) if they want to decrease the dependence on exports while containing price inflation.