Another battlefront opens in currency wars
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After being amplified by the banking system, the total volume of credit that enters China has become even more colossal, and the consequent effect on inflation is easily imaginable.
The benefits of the yuan's higher nominal international purchasing power brought by a violent appreciation can only gradually emerge along with imports and overseas investments in future years.
However, the consequent loss of foreign exchange reserves, as well as the vicious asset inflation, will take place instantly.
Unsurprisingly, the yuan's appreciation will cause an influx of hot money, and further strengthen the pressure of inflation.
The US will achieve two results by forcing the violent appreciation of the yuan.
First, the US's actual debts to China will be greatly lowered. Second, the move will create bubbles in China's assets prices. The faster the yuan's appreciates, the greater the impulse to cash out US assets.
When these poisonous US debts are absorbed locally, China's assets bubbles will probably become very dangerous. At that point, the US will probably suddenly raise interest rates, try to lead the fight against global inflation and prick the assets bubbles in China and other countries.
The author is director of the Global Business & Finance Institute and author of the controversial 2007 bestseller Currency Wars. forum@ globaltimes.com.cn
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