January 14, 2011
Only a mere twelve days into the New Year (2011) and China has already set the wheels in motion to use their most powerful weapon, the Yuan, in order to combat inflation. This may well be the first decision of many that will result in the Yuan being phased in as the new world reserve currency.
A stronger exchange rate will be the tool that China use in order to tame their inflationary problems at present. The biggest increases being felt as a result of inflation at this time are; the Chinese housing market, which was most dramatically affected in the southern industrial hub of Guangzhou, where home prices soared by 38 percent in the past year.
Another sector heavily affected was Chinese groceries, with the cost of some foods increasing by 50 percent.
In an attempt to address the loose lending policies being adopted by Chinese banks, Chinas government have ordered their banks to increase the amount of money that each bank holds in reserves with a reduction in the availability of lending.
The strengthening Yuan will essentially result in two ways; 1, their imports will become substantially cheaper. 2, their exports will be more expensive.