China’s government lose control of inflation

Tuesday, 12 April 2011 09:36

China’s decision to keep its currency weak has potentially caused the government to lose control of inflation and risks fuelling wage-price gains as well of course as the ongoing issues with trading partners.

The yuan gained 4.6 % against the U.S. dollar in the past two years of the 10 Asian currencies this is the 2nd smallest gain. Inflation accelerated to 5.2 % in March, exceeding government targets for a ninth month. The yuan’s gain since April 2009 compares with a 31 % increase in the Indonesian rupiah, a 22 % increase by the South Korean won and a 21 % increase in the Singapore dollar. This is also off the back of economic growth rebounding and foreign-exchange reserves growing to a record.

China’s currency the Yuan is currently at 6.54715, twelve- month non-deliverable forwards climbed 0.07 % to 6.3660 per dollar in Hong Kong, reflecting bets the yuan will gain 2.6 %. China has resisted pressure from U.S. officials to let the yuan appreciate more rapidly, rejecting arguments that a stronger currency would make it easier to manage inflation pressures.

China’s economic growth accelerated to 9.8 % in the fourth quarter, driven by a pickup in industrial production and retail sales. The government will report first-quarter economic data on April 15. The People’s Bank of China raised interest rates four times and boosted banks’ reserve requirement ratios six times since the third quarter to help contain inflation. Most believe that the benchmark one-year deposit rate, which has risen 1 % to 3.25 %, will climb another 1.5 % points by the end of the year.

A stronger currency would reduce inflation as foreign goods would be cheaper in China, just last week China reported its first quarterly trade deficit in seven years, driven partly by rising commodity prices and increased internal demand. Inbound crude oil shipments rose 12 % by volume and 39 % by value, while iron-ore imports rose 14.4 % by volume and 82.5 % by value.