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  1. I am struggling with understanding how China's balance of payments (negative, deficit) and balance of trade (positive, profit around 0.5 trln USD) affect it's inflation rate. Obviously, balance of trade profit means that China produce too much for own consuptions, so China sells goods abroad. But why it receives less money that it sends abroad (see payment balance)?
    1. to balance of trade (positive, profit around 0.5 trln $) and balance of payments (negative, deficit), does it mean that factually China perform some kind of artificial credit support of it's economy? Assuming credit multiplier x8 and 0.5 trln USD of balance of trade profit, we obtain in 4 trln USD, which is 25% of it's GDP. Did I get it right?
    2. Then I spot an explanation why actual inflation in China is relatively low - because their (credit) money emission, resulting in higher than optimal money supply, is converted into dollars. If it is true, such convertation should increase USD/CNY rate, because of demand for dollars. Thus, China chose to depreciate its currency in USD terms, keeping excess of CNY in US dollars, resulting in low inflation inside China. Correct?

I am completely lost after a conversation with my senior colleague, who tried to explain this mechanism. I understand every separate term but dont get the whole picture. Could you please point out if I got any logical mistakes in above description? Should I check any definitions? Thank you in advance.

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  • $\begingroup$ Those are a lot of questions in there, and it would be difficult to answer all of them. There’s no simple relationship between inflation and the trade balance, so all of this discussion would be difficult to cover. Realistically, you will need to trim this down to a single question if you want an answer. $\endgroup$ – Brian Romanchuk Apr 24 at 1:36
  • $\begingroup$ Hello thank you for reply. I will appreciate even a mock-up, chain of reasoning. For example A leads to B -> B means H -> H results in K. Thank you $\endgroup$ – Kira Osten Apr 24 at 15:37
  • $\begingroup$ This website is supposed to give answers that match accepted economic theory, not opinion-based hunches about relationships. You really need to decide upon one straightforward question, and state it, without dragging in unrelated information. Otherwise, nobody will look at it, and you are wasting your time. $\endgroup$ – Brian Romanchuk Apr 24 at 20:18

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