This is the argument: a falling inflation rate in China allows the authorities to ease monetary policy to avert a hard landing. Or, as today's Financial Review puts it:
China's government has been given room to ease credit policy further to bolster growth in the world's second largest economy after inflation fell to a yearly pace of 4.1 per cent in December.
The fall in the consumer price index from 4.2 per cent in November, down from a 37-month high of 6.5 per cent in July, is likely to increase Beijing's confidence that inflationary pressures are being brought under control while policymakers look to provide additional support to the economy as export demand slows and the housing market turns down.
This simplistic view fails to take into account complex monetary mechanisms of China's economy. Firstly, China pegs its currency, the yuan, to the US dollar. And because China’s economy runs a trade surplus with the US, it ends up with excess US dollars. To maintain the peg and stop the yuan from appreciating, the People's Bank of China (PBoC) must print yuan to buy these excess dollars. Read More