China might help improve the external situation... (edit.)

Chinese policy-makers are arguing that inflation is not evident so far and that all the easing and rate-cuts are justified because it is not cutting real wages and domestic demand, but as long as inflation does not increase it would not increase nominal exchange-rate and demand for exports, and, buying foreign reserves and devaluing the domestic-currency would also increase inflation and inflation expectation but with a lag, whenever money-supply is increased it increases expected inflation (unless you are in the liquidity-trap) which is observable in the recent data. Higher inflation expectations show that spending is not a problem in China when the labour market is almost cleared; unemployment is close to 5-percent so it is true that the economy is so far stable, but it now needs to change its approach to stimulate the economy. China is moving away from an investment led model to a domestic demand driven economy because external situation is more or less out of an economy’s control and creates uncertainty. It now needs to concentrate on increasing domestic consumption which would also increase external demand by increasing imports; income in the trading partners’ economy would go up. China might stop seeking depreciation and inflation, also the other way, but work on increasing real wages and exchange rate by committing lower prices. Lower prices could also increase export competitiveness. It would increase exports demand by lowering prices and it would also increase imports because real exchange rate wages would appreciate. And, it may also increase domestic demand by increasing real wages. It probably looks good from all the sides... in depreciation exports go up, but imports and incomes go down, it is contractionary... Lower prices would release domestic demand and also demand for exports. This is based on the argument that lower prices increase demand, domestic and external both and higher prices although help exports via the exchange rate but reduce domestic demand and imports. It is true that lower prices are more expansionary. No one knows better than China that lower prices increase demand; depreciation or external-devaluation also lowers prices relative to the nominal exchange rate. To achieve this China needs to lower inflation and inflation expectation, and the conventional way of doing this is to increase interest-rate by tightening money-supply. More money-supply after full-employment would increase wage cost, because labour is scarce, and inflation thereby lowering demand. China might change its ideology because its domestic demand may help improve external demand which is also good for its exports.