Benefits of money supply contraction are releasing the pileup of foreign exchange reserve, suppressing the potential asset bubble, minimizing of the polarization of poor and rich, turning the inflation into a stimulus of salary increment and reducing the associated negative impacts to unemployment condition. However, these benefits come with a price, which is the appreciation of Chinese Yuan.
If the Chinese Yuan is appreciating against other major currency, the Chinese
price advantage and labor cost efficiency will be deteriorated. Withdrawal of foreign capital, loss of international competitive for Chinese exporting and deflation are foreseeable. Thus, the Chinese government should find a balance between the inflation combat and Yuan appreciation to persistently stabilize the economy