Coping with global inflation

US dollar devaluations mean China should improve its innovation and transform its economic development mode

The global financial crisis that erupted three years ago and has taken its toll on the global economy is in essence a crisis of the US dollar as the world's leading reserve currency.

World economic adjustments in the post-crisis period are expected to further unfold in the fierce struggles among relevant countries involving the dollar's status as the world's reserve currency, which will have enormous impacts on the external environment of China's economic development during the 12th Five-Year Plan period (2011-2015).

As part of world's ongoing economic adjustments, global inflation triggered by the depreciation of the dollar will continue into the future, which will increase imported inflationary pressures on China, threaten the country's foreign reserve security and constitute an immediate, and indeed, the biggest challenge to its development over the next five years.

The quantitative easing policy adopted by the US Federal Reserve, aimed at shifting the US' economic losses to other countries, has fuelled sharp devaluations of the dollar and global inflation. Given that 70 percent of China's foreign reserves are dollar-denominated assets, every 1 percent depreciation of the dollar will lead to more than $10 billion of its foreign reserves evaporating.

Also, the drastic price rises of bulk commodities such as oil, iron ore, beans and cotton in recent years, as a result of the US' adoption of the weak dollar policy, have brought huge pressures to China's manufacturers that are heavily dependent on imports of these commodities. China has achieved success in fending off the first impacts of the global financial crisis, but it has yet to come up with effective measures to better resist the new wave of global inflation in a bid to maintain the safety of its financial assets.

The crisis has seriously weakened import demands in developed countries, thus adding difficulties to China's export-driven economy. As China's main export markets, the US, the European Union and Japan - which are all in a serious debt crisis - are struggling to recover from a lingering economic slowdown. This means that China is facing gloomy external demand and has yet to open new export markets for the sustainable development of its economy.

The US is trying to extricate itself from the global financial crisis with new technological breakthroughs, such as Washington's new energy strategy and its new-generation Internet technology, but this will result in huge competition pressures for China. Only by developing some new industries on the basis of self-innovations can China keep up with the next round of technological revolution.