Rising renminbi, not inflation, holds key

The first is through China's role in pushing commodity prices higher. Given its current momentum, China's economy should be able to take these cost increases in its stride. Not so with other major economies where recoveries are already faltering. In these places, high commodity prices are eating into the disposable incomes of workers who are already rattled by high unemployment levels. High commodity prices may also prompt policymakers to raise interest rates earlier than they would otherwise have done.

The second link is through Chinese policymakers' reaction to domestic inflation concerns. Senior figures have been dropping hints over the last few weeks that officials will allow the renminbi to revaluate faster to limit the pass-through from high global commodity prices to the domestic economy.

Measured in dollars, US imports from China today cost only 3 percent more than a year ago. But if policymakers follow through, the price that foreigners pay for Chinese goods will rise by more in the months ahead. Anyone worried about China exporting inflation should be watching the renminbi rather than the current level of China's consumer price inflation.

The author is a senior China economist at Capital Economics, a London-based independent macroeconomic research consultancy.

(China Daily 05/05/2011 page9)