China fights inflation by printing money…
Obama had his buddy from China over for dinner this week. The two countries are good to talk about each others’ flaws and shortcomings. The US keeps repeating that China is manipulating its currency to peg it to the US dollar and thus hurting US exporters. China is getting tired of Mr. Bernanke’s printing press devaluing the dollar and exporting inflation in their homeland. Food prices rose by more than 10% in 2010 in China.
We know the US is printing money, the Fed chairman made it very clear for the last 2 years with the 2008 bailout and QE II. But China? Well, to fight inflation they first increased the banks’ reserve requirements to curtail lending. That would have maybe slowed down inflation but then they go and buy tons of US dollars with freshly new printed yuan to keep the peg going. Since Bernanke is devaluing fast – the Chinese have to buy more, fast. In the 4th quarter of 2010, their foreign currency reserve jumped $199 billion to $2.85 trillion. This suggests that China is printing more than $2B RMB per day. The problem is that when they print yuan – those yuan stay in the country – unlike US dollars (lucky Mr. Bernanke) – bidding up prices. Oh next thing of course (it is in every politicians’ manual) they will try – à la Nixon – price controls which won’t work.
On the other hand, many commentators in the US, politicians, even Donald Trump (!) want to “stick it” to China and say – impose big tariffs on Chinese goods (yes that went very well with Smooth & Haley during the Great Depression). They say China is not playing fair play. Well who is? One would be tempted to say that it’s not nice to threat your major creditor that way… they hold close to 50% of US debt. If and when China understands that it is not to their advantage to keep suppressing the yuan and stop buying US T-bills – making a few US exporters happy will pale in comparison to loosing your major debt pusher.