China has been using a weak currency to keep its wages and prices low in dollar terms; market forces have responded by pushing those wages and prices up, eroding that artificial competitive advantage. Some estimates I’ve heard suggest that at current rates of inflation, Chinese undervaluation could be gone in two or three years — not soon enough, but sooner than many expected....
[F]or whatever reason — the power of export interests, refusal to do anything that looks like giving in to U.S. demands or sheer inability to think clearly — [Chinese leaders are] not willing to deal with the root cause and let their currency rise. Instead, they are trying to control inflation by raising interest rates and restricting credit.
This is destructive from a global point of view: with much of the world economy still depressed, the last thing we need is major players pursuing tight-money policies. More to the point from China’s perspective, however, is that it’s not working. Credit limits are proving hard to enforce and are being further undermined by inflows of hot money from abroad.
With efforts to cool the economy falling short, China has been trying to limit inflation with price controls — a policy that rarely works. In particular, it’s a policy that failed dismally the last time it was tried here, during the Nixon administration. (And, yes, this means that right now China is going to Nixon.)
Monday, January 24, 2011
"China Goes To Nixon": Paul Krugman
Paul Krugman on China's Nixon initiative: