Posted by WARREN MOSLER on January 29th, 2010
The circumstantial evidence builds that there’s already an inflation problem, politically, probably due to those up and coming kids with the western educations at the finest schools pestering their elders about it.
And, if so, when foreign direct investment loses its profitability due to rising domestic costs, the currency fundamentals could work to drive it lower, taking away the presumed option of reducing the cost of imports by letting it float higher.
An early warning might be a shrinking of the size of the premium in the currency forwards.
It seems possible that Chinese officials could allows their currency to strengthen in the first two weeks of Feb prior to the beginning of the Chinese New Year holidays. If there is one thing that Chinese officials fear the most it is inflation – inflation is the only thing that can touch everyone in China and continued low inflation is the best way to prevent social unrest. Clearly they are looking to any way they can to tighten financial conditions and stronger fx would be one component. It is interesting that recent press reports stated that Chinese officials wanted to call back January loans made to recent borrowers, possibly reducing the windfall speculative borrowers would get in a one time revaluation.