September 24, 2011
The NYT reports on evidence that China’s economy is slowing, which it suggests is bad news for the world economy, since China has been a main engine of world growth in the last 2 years. The slowdown that China is experiencing is being deliberately engineered by its central bank as a way to combat inflation.
While the article implies that the slowdown makes it less likely that China would raise the value of its currency, which would increase its imports from the rest of the world and reduce its exports, a rise in the value of the yuan would be an obvious way to achieve the desired slowdown. In other words, as an alternative to the measures taken by China’s central bank to reduce lending, the bank could simply raise the value of its currency against the dollar and other major currencies. This route would also have the advantage of directly reducing the inflation rate by making the goods China imports from the rest of the world cheaper.
There are reasons that may opt not to go this route, most obviously that the export-oriented industries may have more political power than the industries that will suffer as a result of the central bank’s measures to reduce lending, however it is worth pointing out that these are alternative mechanisms for slowing the economy. If China does not raise the value of the yuan, it is not because its economy is slowing, it is because it has opted to take an alternative route for slowing its economy.
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