Tuesday, July 12, 2011

Chinese Inflation Continues

Inflation rose to a three-year high of 6.4 percent in June, data showed on Saturday. The comments mark a fresh attempt to show the inflation fight is far from over and the government is determined to bring prices back under control, analysts said.
I guess this didn't work:
The central bank has raised interest rates five times and bank reserve requirements nine times since last October as the inflation threat has grown.
Bank reserve requirements may not be able to be used as a further weapon:
Many analysts expect the central bank to lean more on interest rates to fight inflation in coming months, partly because they see limited room for higher bank reserve ratios, which for big banks stand at a record 21.5 percent.
So, the other two tools that they can use are interest rates and exchange rates.

Higher interest rates tend to make your currency stronger. If you try to keep your currency rate down while raising interest rate, you just get more foreign money pouring in. To fight inflation you want to lower your monetary supply not increase it.

Looks like I will sit on my RMB CDs for a while longer...I will enjoy the higher interest and then hopefully some more currency appreciation.