Wednesday, January 20, 2010

China Is On a Monetary Treadmill

"NEW YORK—With a string of credit-tightening measures, China's authorities have subtly demonstrated their concern about a speculative, inflationary buildup in their country's property and stock markets.

What isn't clear is whether these steps are a precursor to a more dramatic measure—a revaluation of the Chinese yuan—or an alternative to it. Although analysts are increasingly predicting a yuan appreciation, there is still no indication that Beijing is willing to weaken its hitherto successful fixed-exchange-rate model for boosting exports and driving economic development.

The problem is that credit conditions and exchange rates aren't mutually exclusive. The more the authorities show their inclination to tighten policy, the more speculation over a currency revaluation grows, the more "hot money" inflows enter the country in a bid to profit from such a move."

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