May 24, 2007 | posted by Michael Baxter in IABN |

Maybe, to paraphrase ’80s pop band T’Pau slightly, it’s China in his hands. Yesterday, Alan Greenspan did it again.

Earlier this year he caused all kinds of nasty fallout in the US when he warned there was a one-in-three chance the US would hit recession. Then, yesterday, the former chairman of the US Federal Bank, whose warnings on irrational exuberance made during the late ’90s were ignored, turned his attention to China. He said the Chinese stock market was due a “dramatic contraction”. And just on cue, within minutes of those remarks, down went Chinese shares.

A Chinese delegation is in the US at the moment talking trade. So far it’s been agreed there will be more US flights to China and greater access to Chinese financial markets, but the contentious issue is still a no go area.

The US wants to see the Chinese currency appreciate. The Chinese government recently upped the range the currency could move in, but experts still say the currency is undervalued by around 40 per cent. All, in all, the token movements of a few miserly per cent that we are seeing at present is just one tiny brick in the great Chinese wall.

But here is the oddity. If the Chinese yuan was to rise by, say, 40 per cent, the immediate effect would be higher priced goods from China. As you know, the single biggest factor that has kept inflation down across the world in recent years has been cheap goods from China.

So, the obvious effect of a rising Chinese yuan would be higher inflation across the developed world, and higher interest rates, just at a time when the US needs rates to fall.

Mind you, there is an element of damned if you do, dammed if you don’t. In China, right now inflationary pressures are building. This could be tackled by allowing the yuan to appreciate, or the inflation could be left unchecked. If China continues to choose the latter route, inflation from China could be exported to the rest of the world.

So, right now, it would appear, there’s a danger of global inflation picking up whichever way China reacts.

Still, in this day and age, we should be grateful. Both the US and China are talking the same language - the language of capitalism. And who needs weapons of mass destruction when you have Alan Greenspan on your side?