THIS WEEKEND'S G7 meeting in Boca Raton, Florida, again sees finance ministers of the leading industrialised nations gather to dissect the increasingly imbalanced-looking global economy and dysfunctional currency markets. While the Bush administration publicly vacillates over whether it has a flexible or strong dollar policy, the trend so far has been unequivocally down. The question is whether its decline can continue to be managed down without major dislocation to the world economy. The lowest interest rates in a generation are critical to sustaining the United States economy's recovery - especially in a presidential election year. The dilemma is whether to raise interest rates - and potentially derail the recovery - or leave them alone and risk seeing the dollar's fall become less orderly. These interest rates give investors scant incentive to stay in the greenback, especially as the US trade deficit approaches 5 per cent of gross domestic product - a level which might spark a currency run in a smaller country. And the Fed is dismissing signs of incipient inflation which would lead to higher interest rates. Amid this weekend's closed-door discussions, it seems odd that one country rarely out of the economic headlines is not present. China, so inextricably connected with its dollar peg and bilateral trade with the US, is absent. After all, if China was guilty as charged with exporting deflation, could it not also be a future exporter of inflation? China's contentious currency peg to the greenback has meant that not just its exchange rate, but also its monetary policy is abdicated to the US Federal Reserve - an agreeable state of affairs that led corporate America to outsource manufacturing en masse. Cheap labour and a fixed exchange rate could almost confer on China the status of the 51st American state. Back in the US, these cheap Chinese imports have contributed to record productivity enhancements and put a strong damper on inflationary pressures. Despite the Fed keeping its foot down full-throttle through 13 interest rate cuts and three tax cuts, this monetary expansion, together with a depreciating currency, has not shown up in inflation. One Fed governor confidently forecast this week that inflation could even be ruled out this year and next. But these similarly loose monetary conditions in China, exacerbated by the building up of mountains of unsterilised foreign reserves, have not managed to defy the more basic laws of economics. They are showing up in Chinese inflation. So far, inflation signs have been muted. China's CPI rose to 3 per cent in November, the fastest rise in six years, yet increasing anecdotal evidence suggests this may be the start of a new inflationary cycle. This week, China's largest television maker, Sichuan Changhong Electric, said it would raise prices of its sets - for the first time since 1996. As China manufactured 40 per cent of the world's televisions last year, it does not seem too big a stretch to assume wider price pressures. Already the appetite of China's prodigious manufacturing machine has propelled the prices of a range of internationally traded commodities to fresh highs - traditionally a harbinger of broader-based inflation. Surely cold rolled steel and coke prices rise for both American and Chinese car manufacturers? And if China does eventually allow its currency to appreciate, this would make its exports more expensive - exporting inflation, not deflation. The other place analysts typically look for fresh signs of inflation is in the bond market. Here China, along with Japan and other Asian central banks, has also played a part in suppressing inflationary signals through its purchase of US treasuries. Since September's last G7 meeting in Dubai, the chorus of calls for China to revise its currency peg has become less vocal - at least in public. Perhaps President Hu Jintao showed President George W. Bush some interesting credits in his wallet during his last summit - increasingly large Chinese purchases of US treasuries. Inevitably, analysts and traders will dissect and second guess the G7 communique after the meeting in Florida. But perhaps it is not these central bankers one should be paying attention to, but the ones at the People's Bank of China. If China can export deflation, drive up commodity prices and mop up excess US government debt, perhaps it can also drive up inflation or even interest rates? Maybe not today, but sometime soon.