World Bank Recommends China Tighten Monetary Policy, Increase Exchange Rate

With concerns over the rising inflation in China and vulnerability for asset bubbles in the country, the World Bank recommended China should have a strong exchange rate and tighten up their monetary policy.

Both of these considerations have already been mulled over by China, as they recently announced they're looking at tightening up their monetary policy, and under the right conditions and the right time, will allow their currency to go higher.

India has already made their first move toward tightening monetary policy by surprisingly raising their interest rates recently, and are expected to do that again in April.

China seems to want to have their growth rate go down a little to about 8 to 9 percent a year, something they believe they can manage. They have been growing in the double-digits, something most believe needs to be cooled down so China doesn't enter into a bubble.

For the world bank, they've upwardly adjusted their gross domestic product projections for China from 8.7 percent to 9.5 percent, probably what generated their concern, as it's at the top of the economic comfort level.

Concerning a stronger yuan, that would possibly help China lower some of their inflationary pressures by import prices falling as a result, which would slow down demand as well. It would also help diversify the economy and move them toward more consumption and services rather than so strong in investment and industry.
 
Assuming China does grow at the 9.5 percent rate estimated, they would pass Japan as the second-largest economy in the world, only behind the United States.