The first may be the danger of identifying the real economy with the financial or monetary economy, or of looking at monetary policy as the be-all and end-all anchor of all economic policy. Money and credit are a commodity like others, not a proxy for the entire economy which uses money as a medium for valuation and exchange. Interest rates are the price for credit but it's the level of all prices (reflecting their rate of change), not just of credit, that drives the economy.

Rising price levels in China reduce foreign-exchange demand for RMB for investment because they lower the "purchasing power" of the RMB in terms of the amount of goods one unit of the currency can buy. Higher interest rates are the exception but higher goods prices neutralize the ability of interest rates to cause appreciation of the RMB. Think of the negative effect of higher prices on the ability to export, resulting in less foreign demand for RMB.

A second reason for the erroneous thinking relates to China's economic rise's still being in its early stages. In this period, the contribution to economic growth by construction of infrastructure and buildings is disproportionately high compared to the contribution made by the use of those facilities. This attracts real-estate investment fed by credit availability, and that is investment which seeks to profit from price appreciation, not from income from use. So, higher real-estate prices, like high interest rates and the price of other investments, wind up serving to appreciate the RMB rather than acting as goods prices.

But there are a lot of other prices driving China's economy, and their rise has the effect of depreciating the RMB. Furthermore a price rise by a company makes it more profitable and this serves to attract market investment away from real estate into other sectors of the economy where it is not financed by the mortgage credit that would otherwise be made more available by ever higher real-estate prices, or away from other "fixed-asset" over-investment that has been driven by artificially-low input prices.

Foremost among those prices are the prices of energy, the economy's most important single input. If any industrial policy needs to be consistent with the rest of economic policy, it's energy policy. But few economists understand energy because of its nature as a bulk-market commodity and many get distracted by its nature as an essential commodity. Economists typically understand best the retail markets they deal with in their everyday lives.

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