Should China Revalue its Yuan to counter inflation ?

China’s inflation rate has hit a 10 year high of 5.6 percent in July, a leap which has raised expectations of further tightening measures and increased concerns about an eventual impact on the economy.

The rise in the CPI was mainly due to the higher food prices, a result of a shortage of staple meats, (especially pork, following an illness which killed millions of pigs later last year), and higher feed costs.
Food prices have jumped by 15 percent driven by 45 percent surge in meat and poultry prices, however the Non Food prices have risen only by 0.9 percent


The impact/ role of money flowing in China through trade surplus cannot be ignored while considering the rise in food costs due to the excess liquidity in the economy.
Chinese Interest rates have increased three times this year to curb the growing money supply in the economy.

To prevent the rising liquidity in the economy, China may have to resort to revaluation of Yuan. As long as the Yuan is undervalued, China cannot increase the interest rate because it might end up attracting even higher quantities of capital inflows for interest arbitrage.

China is trying to tackle the food inflation impact by enticing farmers to raise pigs by subsidizing it by 80%.
However this may not turnout to be the permanent solution, because excessive liquidity would still remain in the economy and hence the inflationary effect would shift to other some other areas such as services and manufacturing.
It is time for the Chinese government to revalue Yuan to reduce its salability in the global market which would cut down China’s export, however would help China counter inflation much easily and comprehensively.