If the US Government had a technology that could export inflation to China, what would the control knob be set at right now? (Hint: Our dollar is in an apparent free fall.)
Currency pegs under pressure
A big concern is whether countries in the Middle East and Asia will abandon the dollar pegs that are holding their currencies down. Oil exporters, with huge current account surpluses, are watching inflation tick up but are constrained in their use of monetary policy. The problem is similar in China’s, but swap oil for toys.
Beijing fears social instability from higher oil prices
Beijing is particularly concerned about inflation’s impact on the cost of raw materials and wages which affect the willingness of foreign capital to invest in China to take advantage of its low-cost labour force.
It also fears a wave of social unrest that might be unleashed by hundreds of million of people living at the margins of its booming economy.
If they revalue their currency, then oil gets cheaper. However, they would also lose their low-cost labor. Rock meet hard place. If we are on an unsustainable path then they are too. That's just my opinion of course.
See Also:
The Cost of the Canadian Dollar
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