China's government follows a mercantilist trade policy, meaning that it attempts to manipulate international trade -- via tariffs, subsidies, regulations and exchange rates -- in order to maximize the amount of money that flows into the country. This policy is unlikely to change anytime soon. Also, China's government exerts very direct and stringent control over its banking system, as evidenced by the rapid expansion of bank credit during the first half of this year at the behest of the government, and the subsequent slowing in the rate of credit expansion, again at the behest of the government. Thanks to its domination of the banks, China's government has a level of control over money supply that central-planners in the US and Europe can only dream about.
Chinese policymakers will not willingly relinquish the influence they now enjoy over the internal Yuan supply and the value of the Yuan relative to other currencies. For this reason, the increasingly po...
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