Why does China not see how their economic strategy will fail? China's economy is heavily based on exports, but at the same time they refuse to let their currency appreciate.
This will lead to several problems:
1. Inflation, since huge amounts of renminbi are both received from exports, and the PBOC has to print large amounts of them to buy foreign currency to ensure the renminbi's weakness. In order to stave off domestic inflation, the PBOC has extremely high interest rates (although they have recently been cut somewhat), which will attract forex carry traders, who will buy more renminbi, resulting in it appreciating, which will result in the PBOC printing even more renminbi to buy foreign currency in order to maintain it's weakness, and the cycle starts anew.
2. Loss of purchasing power, since imports of raw materials such as iron ore and coal become more expensive due to the weak renminbi, which will cause...
3. Eventual collapse, as China will continue to depreciate its currency and raise interest rates, which will result in China being unable to import necessary raw materials and businesses will be unable to obtain credit, which will be devastating for it's main industries and it's people.
China needs to let it's currency appreciate, and develop its domestic businesses. Otherwise, it will collapse.
This will lead to several problems:
1. Inflation, since huge amounts of renminbi are both received from exports, and the PBOC has to print large amounts of them to buy foreign currency to ensure the renminbi's weakness. In order to stave off domestic inflation, the PBOC has extremely high interest rates (although they have recently been cut somewhat), which will attract forex carry traders, who will buy more renminbi, resulting in it appreciating, which will result in the PBOC printing even more renminbi to buy foreign currency in order to maintain it's weakness, and the cycle starts anew.
2. Loss of purchasing power, since imports of raw materials such as iron ore and coal become more expensive due to the weak renminbi, which will cause...
3. Eventual collapse, as China will continue to depreciate its currency and raise interest rates, which will result in China being unable to import necessary raw materials and businesses will be unable to obtain credit, which will be devastating for it's main industries and it's people.
China needs to let it's currency appreciate, and develop its domestic businesses. Otherwise, it will collapse.