Growth in China Lowers U.S. Inflation

By tying the value of the Chinese Yuan to the U.S. Dollar, China is driving asset inflation in their own country and allowing  the U.S. to dodge it. As the value of the USD weakens, which it has since 2001, so too does the value of the Chinese Yuan relative to other currencies. So for instance, as the euro strengthens against the USD and the yuan, Europeans begin buying cheaper assets abroad. Since China is currently a more attractive investment than the US because of its astronomical growth rate, most Europeans will invest in China driving asset inflation. The United States, which would have a relatively lower rate of foreigners purchasing domestic goods, dodges asset inflation. Thus, the floating peg policy which ties the value of the yuan to the USD helps lower inflation in the U.S. and may create an asset bubble in China.

It will be interesting to see how this dynamic conflicts with the trillions of dollars the government has pumped into the system, which will surely put pressure on prices to rise in the U.S.