What have China’s money supply and America’s money supply got in common?

At the end of What do Chinese economists and Rhianna’s feet have in common? we saw how China mops up extra money flowing into its country as the United States buys its goods. While this will reduce the money supply, we have learnt that it will also increase interest rates. Americans are currently getting around two percent on their saving deposits, but if they were to put it in a Chinese bank account they would get closer to seven or eight percent. Better yet, why not borrow money in America at rock bottom interest rates, exchange it to renminbi at a fixed unchanging rate, and put that money in a Chinese bank account. The continuation of this process will increase the money supply in China, and negate attempts by the Chinese government to reduce it. Up until recent years the Chinese have of course been wise to this “carry trade” (after all, this concept was foreseen by mundell and flemming in the 1970s) and have had tight “capital controls” over money flowing out of and into the country. However loosening of those controls means that as the Chinese central bank raises interest rates to "make way" for the American demand, "hot" investment money will flow in and interest rates will fall again, rendering null and void the attempt to curb inflation.

China’s economy is less than half the size of the United States as measured by income or GDP. However China’s money supply was measured in October to be a third larger than that of the United States in this article. As the US continues to depress its interest rates by printing money, the carry trade will flow into China and balloon their money supply, and the Chinese will have limited ability to contain the torrent.  This is the so called “impossible trinity” proposed as part of the Mundell –Flemming model. Of a fixed exchange rate, free capital flows, and control over the money supply, you can have any two, but you can’t have all three. And that’s why. An inflationary monetary policy in the US will translate to an inflationary monetary policy in China. So what have China’s money supply and America’s money supply got in common? Unfortunately for China’s money supply: Ben Bernanke.