Chinese inflation, monetary policy and the dollar peg

The big political news in America last week was the House vote to avoid a total government shutdown while President Obama broke bread with several GOP Senators (POTUS paid…with his own money!)

This guest post was submitted by Joe Gagnon, a senior fellow at the Peterson Institute for International Economics.  Joe is an expert on international economics has spent a great deal of time studying the effects of exchange rate depreciation.  Even if the dollar depreciates sharply in the near term, he argues that is unlikely to have adverse effects – primarily because inflation will stay low.

This week marks the start of  annual plenary session of the National People's Congress (NPC) in China. This is the meeting that will see Xi Jinping and Li Keqiang appointed to the position of president and premier respectively. For the most part, this is a meeting with few specifics.

The Angry Bear submits: By Rebecca Wilder Premier Wen Jiabao made stabilizing prices China's top economic priority for 2011. Amid the surge in world energy costs, this story didn't make the front page. However, Chinese policymakers did take their time spent out of the limelight to allow the Chinese yuan to appreciate roughly 0.3% against the U.S. dollar.

The latest Chinese data shows a disappointing start to the second quarter. First, a quick round-up of the latest data from China:

There was much chatter by the punditry in the early part of 2013, when the Shanghai Composite appeared relentless in its surge, when it was tracking the S&P virtually tick for tick, hitting a 2013 high in mid-February, and which was "explained" to be the prima facie proof of the Chinese rebound. The reason said chatter has disappeared is that as of last night's close, the SHCOMP is now officially red for the year.

There was much chatter by the punditry in the early part of 2013, when the Shanghai Composite appeared relentless in its surge, when it was tracking the S&P virtually tick for tick, hitting a 2013 high in mid-February, and which was "explained" to be the prima facie proof of the Chinese rebound. The reason said chatter has disappeared is that as of last night's close, the SHCOMP is now officially red for the year.

Rising inflation, higher property prices, and policymakers' focus on growth has raised a few questions about Chinese monetary tightening.  But there has been much confusion about what metrics to track. Should we be watching broad money supply, measures of credit like loan growth, total social financing (TSF) and so on, or interest rates.