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Inflation Is Key Risk As China Sees Surge In Trade

1268 words - 6 pages

Article: inflation is key risk as China sees surge in trade

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.( Cited from:, 15 April 2011) .As inflation is a problem for many reasons ,the main one is that once it takes hold ,it is unpredictable. Unpredictable inflation is a problem ...view middle of the document...

The pressures of inflation will be reduced by the currency appreciation of Renminbi. To control the high inflation in China, it depends how the Chinese policy makers would react to high inflation. To reduce inflation, the Chinese central bank would have to reduce, or at least limit the growth of the domestic money supply. (Cited Cited 15 April 2011).This can be done in various ways. In the case of high inflation, one of the effective ways to reduce money supply would be to let the Chinese currency CNY appreciate. This would mean that Chinese exports become more expensive and with less international demand for Chinese exports the overall economic growth in China would likely decrease.

Along with the economic growth, the RMB also seems to have a rapid escalation. China has achieved an 8% GDP growth in 2009, and is further predicted to accomplish a 9.6% GDP growth in 2010. Simultaneously, the inflation rates are also shooting up. In February, the consumer price index and producer price index experienced an increase of 2.7%, and 5.4% respectively, which was higher than the previous month. “A small factor of the revaluation is the pressure from the US. A big factor is inflationary pressure in China,” said Gao Shanwen, an economist with Essence Securities in Beijing. As a result of RMB currency revaluation, it has positive and negative effects on China’s economy development. The revaluation is on the overall, a strong net positive effect, for 2 reasons: It allows the Chinese government to potentially prevent future overheating and hard landings in the Chinese economy, while still keeping the exchange rate basically stable; It helps to ease the political tensions relating to trade between US and EU, and China. This announcement has already been welcomed by a number of senior US policy makers.(Cited,15 April 2011). Increase in the RMB exchange rates will help to minimize import costs of China, and help to reduce domestic inflationary pressure.
[pic]table4(Cited 15 April 2011).

On the other hand, while the RMB exchange rate has appreciated continuously,the export trade in China will be effect as China is the biggest exporting country in the world. US will have to pay more cash while importing Chinese products. This will not be appreciated by US, especially for its domestic demand. The appreciation will have an impact on the Chinese stock markets, and the profitability of the Taiwan owned companies based in China, especially the export oriented.(Cited 15 April 2011). The value we can use the expenditure approach to measure GDP as the sum of consumption expenditure, investment, government expenditure on goods and services, and net exports. The formula is...

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