China’s inflation: One-off revaluation becoming the lesser of two evils

Overview

The government’s new anti-inflation strategy is based on tight controls on bank lending and a faster appreciation of the yuan. In practice, these two policy tools work at cross purposes. Faster, but controlled, appreciation of the yuan will spur the growth of China’s domestic liquidity bubble, intensifying the inflationary pressures the lending caps are meant to control.

Although the top leadership will resist a one-off revaluation of the yuan, this option may prove to be a lesser...