Charts: Why China has such a high inflationary pressure?16 November, 2010, 22:56. Posted by Zarathustra
Tags: Economy, Inflation, Money Supply
Another time with a few nice charts speak louder than a thousand words. It’s all about money supply.
China M2 Money Supply
Source: People’s Bank of China
M2 Money Supply, China vs. US (rebased, Jan 2004 = 100)
Source: People’s Bank of China, St. Louis Fed
Although an undervalued currency served China well in terms of exports, there is a price of it: a higher general price level. In a little more than 6 year, the M2 money supply expanded more than 200%. The reason is that as the demand for Chinese goods rose, so did the demand of Chinese Yuan. However, to keep the Yuan from appreciating, the Chinese authority can do nothing but increase money supply. That is why the monetary expansion has been so high, and the foreign exchange reserve is so huge. This huge monetary expansion would not have only caused inflation, but also asset bubbles, which I have been talking on that repeatedly.
That is why allowing Chinese Yuan to appreciate would, in many ways, be sensible.
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