Closer to a Yuan Revaluation?

Back in August, I wrote that a rise in inflation in China might make the Chinese government more inclined to revalue the yuan against the dollar. Part of Stephen Roach’s commentary this week suggests that that time might be getting closer:

Meanwhile, there has been an important shift in the Chinese inflation dynamic: After 15 months of deflation, China transitioned back into positive inflation territory at the start of 2003. And slowly but surely, the rate of inflation has begun to accelerate. The just-released inflation report for November 2003 was mildly disturbing — a 3.0% y-o-y increase, which represents the sharpest rise in nearly seven years. The mix of Chinese inflation is important, but not for the reasons we stress in the industrial world. The recent surge is concentrated in food prices, where annualized inflation is now running at an 8.1% rate. Weather-related or not, this is a big deal in a nation that still has about two-thirds of its population living at poverty levels. Unlike the West, where we strip out food in an effort to come up with “core” inflation, the Chinese have no such luxury…

As you know, the China issue has been growing for months. So this news matters. If the Chinese are serious about wanting to slow inflation, they will have no choice but to revalue, for various reasons. But first, they’ll probably try to sell some of their $500 billion of US government bonds.

The year 2004 could bring some interesting times…

Kash