Chinese Monetary Policy Set By – Ben Bernanke?

monetary policyThe Chinese economy, at least the part we can measure, is fast closing on Japan's status as the second most productive in the world. With a wall of secrecy still solidly in place between China and rest of the world, especially the West, researchers can only estimate the true economic output of this communist juggernaut. The curious issue that comes to mind is why, pray tell, Chinese leaders have chosen to have their monetary policy set by Ben Bernanke, of all people?

By tying the value of its national currency, the yuan, to that of the United States, China has effectively chosen to allow the Federal Reserve, in the often delirious hands of Mr. Bernanke, to set their monetary policy. Right now, the Chinese dragon is a teensy bit peeved at the economic care they're receiving from the illustrious Mr. B, mainly due to a little thing called inflation.

The Chinese are not used to inflation. They don't like it. While the wall between East and West is high, it isn't impervious to an influx of cash through black market efforts, which means the money supply in China is increasing. Here in the Western world, we're well aware of the fact that a growing supply of money leads to inflation. The real problem the Chinese are running into by allowing Bernanke to set their monetary policy is that the Federal Reserve has no mandate to protect Chinese interests, as it does with the United States, thus find themselves left to twist in the wind while the chairman struggles to find an interest rate balance that works best at home.

It seems to us that China has a tough choice to make. Despite their best intentions, the value of the yuan will not stay artificially low forever; it's going to rise at some point. Should it be unpinned from the dollar and allowed to rise naturally to take its place among the other major world currencies (euro, yen, U.S. Dollar), or continue to allow Western hands to guide the Chinese economy, a monetary policy that will also result in a devaluing of the yuan through inflation?

Welcome to reality, Mr. Hu Jintao, welcome to reality. Capitalism is not a market force amenable to control and incremental increases. We're about to see either a torrent or the kind of lockdown that makes dissidents weep.

The American Monetary Team

American Monetary Association

Flickr / ernop

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