Chinese Inflation high
China is experiencing the same rate of inflation the United States is seeing due to its currency and its near peg to the US Dollar. Food and energy prices have gone up the at the fastest rate in the last 12 years. The consumer price index rose 8.7% since just last February.
The Chinese are taking a heavy inflation hit because the peg to a basket of currencies which is largely in US Dollars. The value peg means that as the US Dollar has fallen in value so has the value of the Chinese Yuan. The peg has brought the value of the Yuan down in order to keep exports to countries like the US.
In this market, I would expect soon that China will start to unload its dollars in favor of Euros or pounds. In just the last few years, China has purchased a trillion dollars worth of US Treasuries and currency. The large trading deficit means that China has stockpiled large quantities of dollars that could soon hit the market.
If China begins to sell off its portfolio of currencies, including its holdings in US Dollars, the world market won’t be able to buy up the large volume of dollars on the market. Luckily for the United States, China has thus far held the dollars out of circulation, once they hit circulation inflation will set in quickly.
If China does sell its collection of US debts, expect the dollar to drop even more and the Yuan to rise in value. This hasn’t happened yet because China wants to keep the value of the Yuan low to perpetuate the trade deficit.
