ark photo apr 08-1_head shotArthur Kroeber by Fantake via Flickr

Bubbles in real estate and otherwise could have a negative effect on China’s economic development and inflation could become a serious problem in 2010, warns economic analyst Arthurs Kroeber in Citiwire from the UK:

‘At this stage, although Beijing denies it, inflation could become a serious problem for China’s economy, which is growing at above its potential. It increasingly seems that a continuation of the current loose monetary policy – which is what the government has promised – is a sure recipe for CPI inflation well above the government’s rosy 3% forecast for next year.

‘As the year closes, it seems to us that inflationary pressures in China will force a rethink of policy settings in the second quarter, leading Beijing to adopt a slightly lower growth target, a somewhat higher inflation tolerance, and a willingness to let the renminbi start rising again.’

While the revaluation of the Renminbi, China’s currency, is high on the political wishlist of the rest of the world, fast changes are not to be expected. Kroeber:

‘A smarter approach today would be to do a surprise one-off revaluation within the next month, followed by a reasonably wide trading band that would create both long-term appreciation and short-term unpredictability.

‘Unfortunately, we do not think this is the most likely course of action: delay and gradualism are more probable. But for the first time in many years we are not willing to rule out a quick jump in the renmimbi. It might be as well to hedge one’s bets. And more importantly, we should start to doubt Beijing when it says it has inflation under control.’

Arthur Kroeber is a speaker at the China Speakers Bureau. If you want to share his insights at your conference, do get in touch.

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