Is there a coincidence that the quinquennial Chinese Communist party meetings are underway this year -- and concurrently over the past six months -- one has observed the decline in the sterilization ratio by the Chinese central banks? (As per Tim Bond of BarCap (no link available), this ratio has fallen to around 34%. i.e., sterilization ratio = balance of payment surplus less outstanding governmental bond sales). As Krugman and Obstfeld tell us, increased pressure on the currency to appreciate can be met by selling more domestic currency and thus accumulate foreign reserves. The rise in domestic currency must be met with sale of government bonds -- resulting in reduction in outstanding monies in the hands of the "real" economy. The incomplete sterilization that Tim Bond reports on starkly has contributed to increased growth, albeit from a monetary side and ignoring Professor Bob Lucas's writings, which has in turn led to a creeping inflation.
Following Professors Alesina & Summers -- see page 4 of following link -- it must come as no surprise that we have seen a gradual relaxation of the monetary conditions given the pressures in the year of the Communist convention. Given the obvious conflicts between varying factions (globalizers, isolationists, Hu Jintao type communists, old fashioned Communists etc etc., ) -- it is imperative that the political powers that be must have a "vibrant" economy to push through their candidates over those proposed by other factions within the power struggle!