HOW DOES A WEAKER YUAN CAUSE INFLATION IN CHINA TO INCREASE

The answer is in Chinas monetary policy China has been pumping credit into the economy for over a decade We call it printing money€ in the west The Chinese call it credit growth China€™s monetary policy is similar to Japans in the 1980s, just on a larger scale The Chinese are not printing money to cover its deficits as Japan did But they are pumping money into the economy to promote economic growth, and they are doing it at a much faster pace than Japan ever did China is running the largest credit bubble in history The total amount of credit in Chinas economy, including loans and bonds China is at least four times larger than the US in terms of credit market debt China is also growing its credit at about twice the rate of the US Thats why the Chinese economy is growing much faster than the US But it€™s also why China is more vulnerable to a collapse in the yuan If the yuan keeps falling, the Chinese will have to print more yuan to cover their dollar debts that€™s why they hav already started to print more yuan In just the past month, China added $70 billion in yuan to its monetary base That’s more than the $66 billion in yuan that China added during all of 2015 A stronger yuan would make it more difficult for China to print yuan to cover its debts That would slow the growth of credit in China and increase the risk of a credit collapse Thats why the Chinese are resisting pressure to let their currency appreciate A US recession could cause China to print even more yuan, which would cause the yuan to fall even faster Thats why the Chinese are resisting US pressure to let the yuan appreciate The Chinese dont want to be blamed for a financial crisis They also don€™t want to take the blame for a US recession So they are trying to avoid both The Chinese are betting that the US will deal with the current account deficit and that the US will also deal with its debt problem The Chinese lost a similar bet when they let the yuan appreciate in 1994 The yuan appreciated against The Chinese lost an estimated $1 trillion in the process