Guest Post: For How Much Longer Can China Resist Raising Rates?

For How Much Longer Can China Resist Raising Rates?

The main focus of QE2 is not domestic but international, exporting inflation and forcing BIC's hands. This is highlighted by Brazil's immediate and very public, very undiplomatic response as well as Bernanke's very undiplomatic jab at China shortly after QE2 announcement. In this it's been very successful. BIC have been trying very hard to resist. Although India has given in and raised rates, Brazil and China (along with other export economies such as Japan and South Korea) have been resorting to other means. But for how much longer can they resist?

China's inflation is particularly worrisome to its policy makers. As a saver's society (and because of the fact that a large portion of the populace still has little disposable income), Chinese people are very sensitive to inflation. And it is because of the same reason that Japan has chosen, wisely so far, the path of lost decades rather than risking over-stimulus and hyperinflation. But Beijing erred badly in their over-reaction to the 08 crisis in late 08 and early 09, going all out trying to stimulate domestic demand and flooding everybody with cash. That was the direct trigger of today's rapidly rising inflation, on top of the chronicle inflation pressure due to exchange rates. But Chinese history is littered with lessons of inflation causing revolutions and social turmoil. Beijing knows this all too well. Although there're potent domestic political forces and economic interests against revaluing the Yuan, when inflation threatens the power, Beijing will have to quickly choose between two evils, and the anti-revaluation camp will quickly recognize it's better to lose some money than losing power all together. (more)