China’s concern over US monetary expansion

As the US effectively prints more money, Chinese officials are expressing concern over the impact that this will have on their economy

As in the UK, the US has engaged in ‘quantitative easing’, which essentially boils down to printing money in order to purchase bonds and inject liquidity into the private sector. The quantity theory of money suggests that an increase in the money supply, such as this, will lead to an increase in the general level of prices (other things remaining equal). Chinese officials believe that inflation is therefore likely to rise in the US, causing the value of the dollar to fall (since one dollar will purchase fewer goods).

Why might this be of concern to the Chinese, you might ask? China holds a significant reserve of US dollars, mainly as a result of its large trade surplus from high levels of exports to the US in particular; indeed, its reserves are estimated to be in the region of $2trillion. To allow its reserves to maintain significant purchasing power, the Chinese may consider converting their reserves into Euros and other hard currencies. This would weaken the dollar’s position as the reserve currency of the world. Alternatively, they would consider purchasing gold. However, one Chinese official was quoted in an article in Telegraph as saying that “Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets.”

This is a particularly good example of the effects of increased interconnectedness, especially in terms of financial and commodity markets. The overall effects, however, depend, I think, on the US Federal Reserve’s ability to reign in the current increase in the money supply once the liquidity situation improves. If the money supply can essentially be contracted, once the velocity of money starts to rise again, then inflation, such as the Chinese suggest will occur, is less likely.

Economics Explained, by Evan [12 Feb 2012]
Evaluating the effect of Quantitative Easing - A Case Against? [12 Feb 2012]
Unit 2 Macro: China’s Trade Engine is Spluttering [10 Feb 2012]
Martin Wolf on Global Shocks [10 Feb 2012]
Stephanie Flanders explains Quantitative Easing in 60 seconds [9 Feb 2012]
Competitiveness [8 Feb 2012]
Trucks are the new way of measuring debt [1 Feb 2012]
Unit 2 Macro: Growth and Development - Some Indicators [30 Jan 2012]
Unit 2 Macro: Signs of Progress for Zimbabwe [29 Jan 2012]
Unit 4 Macro: Focus on India - Comparative Advantage [27 Jan 2012]
Unit 2 Macro: Focus on China - Trade and Growth [27 Jan 2012]
Unit 2 Macro: Focus on China - Inflation [26 Jan 2012]
Unit 2 Macro: Focus on China - Carbon Emissions and Growth [26 Jan 2012]
Unit 2 Macro: Focus on China - Per Capita Incomes [26 Jan 2012]
Unit 2 Macro: Focus on China - Changing Economic Structure [26 Jan 2012]
Unit 2 Macro: Can China Stay Competitive [25 Jan 2012]
Unit 4 Macro: Focus on India - Economic Growth [24 Jan 2012]
Unit 2 Macro: Population Shift in China [23 Jan 2012]
Unit 2 Macro: Exporting to the Booming Chinese Economy [23 Jan 2012]
Unit 4 Macro: Money, Debt and the New World Order [22 Jan 2012]
Unit 4 Macro: Russia Joins the WTO [22 Jan 2012]
Inflation - what’s up, what’s down and what’s going to happen next [17 Jan 2012]
Unit 2 Macro: Videos on Productivity [17 Jan 2012]
Unit 2 Macro: Look Upwards to Find the next Downturn [15 Jan 2012]
Unit 4 Macro: France loses her AAA credit rating [15 Jan 2012]
Unit 2 Macro: Frontier Markets - the New BRICS? [15 Jan 2012]
Beyond the Bike - The Importance of Remittances [15 Jan 2012]
Unit 4 Macro: Time to Re-Boot the British Economy [14 Jan 2012]
China’s newest 5 year plan - and how it could change the world! [12 Jan 2012]
Unit 4 Macro: Competitive Advantage in Trade (Some Videos) [12 Jan 2012]
Unit 4 Macro: UK Bond Yields Reach Record Lows [11 Jan 2012]
Unit 4 Macro: UK Trade Patterns [11 Jan 2012]
Unit 2 Macro: Factors Driving Business Investment [10 Jan 2012]
Unit 2 Macro: Quantitative Easing in the UK [8 Jan 2012]
Unit 4 Macro: Natural Disasters and their Economic Impact [7 Jan 2012]
Unit 1 Micro: Low Cost Airlines Beat the Recession [1 Jan 2012]
Unit 4 Macro: Exchange Rate Economics - Where next for the US Dollar? [31 Dec 2011]
Unit 1 Micro: Biomass Subsidies and Timber Prices [30 Dec 2011]
European Economics: Resources on the CAP [28 Dec 2011]
2011 in Review - The US Economy [27 Dec 2011]
Unit 2 Macro: The UK Housing Market in 2011 [26 Dec 2011]
Unit 2 Macro: Brazil Overtakes UK in Economic Size [26 Dec 2011]
The Eurozone Crisis Explained (again!) [22 Dec 2011]
Unit 3 Micro: Sub Normal Profits - BP Leaves the Solar Industry [21 Dec 2011]
Unit 3 Micro: Oligopoly and Duopoly in Bus Markets [20 Dec 2011]
Rising prices and falling real incomes [13 Dec 2011]
Unit 4 Macro: Celebrating (?) Ten Years of Euro Notes and Coins [2 Dec 2011]
Unit 3 Micro: Tacit Collusion in the Supermarket [27 Nov 2011]
Unit 1 Micro: 50 Years since the end of the Max Wage in Football [23 Nov 2011]
Jim O’Neill - The Growth Map: Economic Opportunity in the BRICs and Beyond [22 Nov 2011]
Beyond the Bike - The Value of Money [19 Nov 2011]
Pasty Prices - Something to Chew Over [19 Nov 2011]
Unit 2 Macro: Should the EU introduce a Tobin Tax? [14 Nov 2011]
Economics at the Movies: In Time [13 Nov 2011]
AS Macro: The State of British Business [13 Nov 2011]
Eurozone crisis - a selection of resources [12 Nov 2011]
Latest world trade data [6 Nov 2011]
Unit 3 Micro: Unilever hit by rising costs [6 Nov 2011]
Unit 4 Macro: China and India - Notes from Martin Wolf [6 Nov 2011]
Australia lowers interest rate to 4.5% [1 Nov 2011]
Unit 3 Micro: Examples of Price Discrimination in Action [31 Oct 2011]
Unit 4 Macro: Should TNCs make full disclosure on factory wages? [30 Oct 2011]
Unit 1 Micro: Economists attack food price speculation [24 Oct 2011]
Unit 3 Micro: Ofcom gives stamp of approval for flexible pricing in mail [21 Oct 2011]
Unit 4 Macro: World Food Day [16 Oct 2011]
Can the “invisible hand” solve Africa’s poverty? [13 Oct 2011]
Unit 2 Macro: Can Exports Drive a Recovery? [13 Oct 2011]
Unit 4 Macro: Unit Labour Costs and Inflation [12 Oct 2011]
Skidelsky in Madrid [12 Oct 2011]
Unit 4 Macro: UK Inflation Charts [12 Oct 2011]
The Return of Protectionism? [12 Oct 2011]
Why Is Macroeconomics Such A Mess? [11 Oct 2011]
University Challenged [11 Oct 2011]
Unit 4 Macro: USA edges closer to naming China as a “Currency Manipulator” [4 Oct 2011]
Unit 1 Micro: Producing Coffee - Kenya in Pictures [4 Oct 2011]
Unit 1 Micro: Homework Assignment on Market Prices [2 Oct 2011]
Unit 4 Macro: When China Met Africa [1 Oct 2011]
Unit 1 Micro: Exercise on Equilibrium Market Prices [27 Sep 2011]
Unit 1 Micro: Exercise on Market Supply [26 Sep 2011]
Greek debt decision tree [25 Sep 2011]
Unit 4 Macro: Greek Economy at Default’s Door [25 Sep 2011]
Unit 2 Macro: Greece on the Brink of Default [25 Sep 2011]
Unit 4 Macro: IMF Flags up Risks of Double Dip [20 Sep 2011]
Unit 4 Macro: Bangladesh and Comparative Advantage in Textiles [19 Sep 2011]
Inflation in India [18 Sep 2011]
Unit 2 Macro: Interest Rates and Income Inequality [16 Sep 2011]
Study Note - Macroeconomic policy objectives [16 Sep 2011]
Study Note - Introduction to GDP [15 Sep 2011]
Study Note - The Circular Flow of Income [15 Sep 2011]
Unit 2 Macro: Economic Growth and Inequality [14 Sep 2011]
Study Note - What is Macroeconomics? [13 Sep 2011]
Mixing with the Nobel Economists [4 Sep 2011]
Starter Activity: Health Economics [1 Sep 2011]
Toilet rolls, soap and climate change [1 Sep 2011]
Unit 4 Macro: Baltic Dry Index and Global Weakening [19 Aug 2011]
Unit 4 Macro: GDP per person since the credit crunch [19 Aug 2011]
Guess where China exports its chopsticks from [7 Aug 2011]
Capital labour substitution at FoxConn [2 Aug 2011]
hiphopnomics [31 Jul 2011]
Monetary Policy Roundtable [25 Jul 2011]

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