China’s central bank increased rates for the fifth time this year. The one year lending rate is now 7.29% as authorities attempt to ease inflationary pressure. However, the build-up of reserves continues as those that can borrow US$ at under 5%, like multinationals and foreign investors, do. The discrepancy between interest rates net of currency appreciation, fuels a carry-trade.
Their other tactic has been to ease investment control allowing investment outside China, which offers some pressure relief valve for money to find its way out of China. This is unlikely to be sufficient however to moderate inflation. This is therefore going to add to pressure for teh Yuan to appreciate. While the Chinese authorities may accelerate that appreciation they are very unlikely to pursue destabilising step changes in the currency that American and European authorities have been calling for.