China finds it hard to tame rising inflation

BEIJING: Suddenly, the new China is looking a lot like the old China. The most obvious sign is the security clampdown before the Olympics��� opening ceremony on August 8.

The Beijing Games were meant to showcase the new China, yet the International Olympic Committee finds itself pressuring officials to allow journalists to view websites previously barred in the nation���s capital.

The most important reminder that China isn���t evolving as hoped concerns economic policy. The yuan last week had its biggest weekly loss since China scrapped its dollar peg in 2005. As the yuan appreciates, it can attract capital inflows that pump up the money supply.

That has increased risks for Asia���s second-largest economy. If China expects to control things, it will have to make its monetary policy consistent with exchange-rate policy. That means lower domestic interest rates, which could cause problems.

Gulf states, including Saudi Arabia and the UAE, are under pressure to revalue currencies or drop their pegs to the US dollar. Inflation is running at more than 10% in five of the six Gulf Cooperation Council states as oil-fuelled growth creates shortages of real estate and services, while the weaker dollar and surging global food prices increase import costs.

It���s a dangerous dynamic even for governments awash in petrodollars. While they can afford to help low-income families, the risk of losing economic control has to be considered. If you are China, home to the biggest population and run by a single party obsessed with keeping things that way, imported inflation is a bigger problem.

China will find that controlling the internet is easier than taming price pressures. Officials in Beijing have compliant executives at Google and Yahoo! helping them censor cyberspace. Even after employing all of the conventional tools of economic policy, cooling inflation is easier said than done.