From Asia Times:
China’s government recently announced that inflation hit a 10-year high of 6.5% in August. This increase in inflation is directly related to global trade imbalances, yet China is trying to control inflation without addressing that problem.
That carries two consequences. First, it is doubtful this strategy can work, which likely signals rising Chinese inflation. Second, the strategy aims to shift the onus of global trade adjustment on to the United States, which may come back to haunt China and the global economy.
China’s current inflation is a textbook case of prolonged undervaluation of a fixed exchange rate in tandem with export-led growth. As such, significant exchange rate revaluation should be a central element of its anti-inflation policy. [Full Text]
Thomas Palley is a former chief economist of the US-China Economic and Security Review Commission.