The Right Way to Beat Chinese Inflation
As China wrestles with accelerating price growth, its central bank has raised interest rates substantially and increased banks’ reserve requirements. But policymakers should emphasize reducing the trade surplus through renminbi appreciation over reducing investment spending through higher interest rates.
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WASHINGTON, DC – High inflation is threatening social stability in China, soaring from 3.3% in March 2007 to 8.3% in March 2008. As a result, the People’s Bank of China has raised interest rates substantially and increased banks’ reserve requirements. The trick for the Chinese government will be to quell inflation in a way that does not compromise its long-term goal of continued strong economic growth. The risks are high.