Chinese inflation Video Lecture - Economics

Given that the Chinese central
bank is printing yuan in order
to keep it devalued to
other foreign currencies,
especially relative
to the dollar,
a question that may have
jumped into your brain
is, is this causing inflation?
And when I talk
about inflation, I'm
talking about price inflation.
Is it making a basket of
goods in China more expensive?
And the other type of inflation
that the word inflation is
sometimes to referring
to is monetary inflation.
That, by definition,
is increasing.
They are definitely
increasing the money supply,
but is it making the price
of goods and services
in China more expensive?
And to answer that question,
I have this article here
from the "New York Times"
written by Keith Bradsher,
early January, 2011.
And he writes, "in
China, consumer prices
were 5.1% higher in November
than a year earlier."
Remember, in the US, we
try to target inflation
to be between 1 and 3%.
So the official government data.
So this is according to
official government data,
they admit that their
inflation is at 5.1%.
But the next sentence is
even more interesting.
"And many economists say the
official figures actually
understate the
rate of inflation,
which might in reality
be twice as high."
And there's tons of
ways to kind of engineer
the actual inflation depending
on what the basket of goods is
and how you adjust for things.
Now though, that
cheap currency policy
seems to be reaching its limits.
The extra renminbi-- and this
is a big point of confusion
when people talk about
the currency in China.
The renminbi is the
name of the currency
while the yuan is kind of
when someone talks about hey,
I give you five yuan, or you owe
me five yuan, something like.
They wouldn't say you
owe me five renminbi.
And a good analogy is if
you go to Great Britain
and you buy something, they'll
say, well it'll be five pounds.
So in Great Britain,
five pounds is
what they say when you're
actually buying something,
but the name of the currency
is called the sterling.
It's kind of like if
people called the dollar
US legal tender.
That's the equivalent
of renminbi,
while you yuan would
be like the dollar.
So five pounds is
called the sterling.
So the similar analogy,
five yuan, they
call that the renminbi.
So they're saying the extra
renminbi are feeding inflation.
That is starting to
undermine exporters' price
competitiveness.
Just as a stronger
renminbi would
do if Beijing was not
intervening to begin with.
So the whole reason why
they're printing this money
is to keep the
currency devalued,
but that's making things more
expensive in terms of yuan.
So in the end, that's
kind of counteracting
some of this cheap
currency policy.
It's making their
exports more expensive.
Money supply figures
for December,
which the central bank
released on Tuesday,
showed that cash and bank
deposits were increasing
at a rate twice as fast as
even China's soaring economy.
So if you increase the
money supply roughly
in line with the
growth in the economy,
then you wouldn't experience
too much inflation.
But they're increasing
it twice as fast.
Ever more renminbi are available
to buy goods and services.
So you see they're
clearly doing that to try
to keep their currency devalued,
but they're reaching kind
of-- it seems kind of a
breaking point where they won't
be able to do it as
aggressively going forward.