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Emerging Markets Quarterly

China: Stimulus Bill Comes Due

Inflation Could Get Worse Before It Gets Better

Aggressive stimulus, mostly through the credit channel, helped China achieve growth rates of 9% y/y in 2009 and 10% in 2010 but came at a high cost in the form of inflation. Although Chinese authorities have begun tightening monetary policy, inflation could be even higher than expected in 2011 as the central bank remains behind the curve. Rising hot money inflows after the introduction of QE2 in the U.S. and strong domestic credit growth at the beginning of 2011 put the central bank at risk of falling farther behind the curve.

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