Kill a couple of problems with one move…
Here are the problems:
- The world economy can no longer rely on the American consumer of last resort, they are repairing balance sheets, which has forced the US Fed to take an unprecedented (and largely futile) QE2 which threatens to sink the dollar
- China has a red hot economy, but it’s too dependent on exports (and investment), it needs to shift towards relying on more domestic demand
- China’s economy is so red hot that inflation is becoming a problem
The simple solution:
- Instead of hiking interest rates (fears of which has the Shanghai stockmarket in a bear grip, falling 5.2%) which would choke off domestic demand, it would be far better to let the yuan rise.
- A higher yuan increases China’s overseas buying power, stimulating the world economy. It would generate real demand for real goods and services abroad. It would also make them cheaper for China to import, and since it’s economy is surprisingly open (for its size), this would dampen Chinese inflation.
Sometimes, things couldn’t be much easier..