01/19/2011 Source: Xinhua

The value of China’s currency seems to have been thrust into the spotlight again recently in world media agencies, which are focusing their lens on Chinese President Hu Jintao’s high-profile visit to Washington between Jan. 18 and Jan. 21. However, is such a focus on yuan misplaced in the context of multi-faceted China-US economic ties?

“It’s not justified that the yuan has been on the top of the China-US economic agenda,” said Lv Suiqi, deputy chairperson of the Department of Finance of Peking University. Instead, “they should pay much more attention to areas where their common interests are at stake.”

The reason for the yuan’s now de facto primacy on the U.S. agenda of its economic or even political policy towards China is that the appreciation of the yuan has been deemed as an “immediate and effective solution” to the U.S. economic problem, said Li Xiangyang, an expert at the Chinese Academy of Social Sciences.

But that is no more than a “short-term” solution and its effect is “uncertain and suspicious,” Li noted. While the global financial crisis has devastated U.S. domestic consumption, the most important engine for the U.S. economy for years, it is not realistic for the United States to improve its competitiveness in a short time. In that context, President Obama pins hopes on exports, pledging to double the U.S. exports in five years.

The United States has also argued that a strong U.S. economic recovery will in turn benefit the world economic rebound as a whole. That is also the claim that the U.S. government has used to defend its second quantitative easing action, which pumped 600 billion U.S. dollars into its economy and has been criticized as a quasi-devaluation of dollar. It also has added inflation risks to emerging economies like China.

However, whether the dollar devaluation could boost the U.S. economy and the global economy remains controversial and doubtful both theoretically and empirically, Li said. The real solution, he added, lies in the development of new growth engines.

Indeed the Obama administration has already taken actions to encourage some emerging sectors that show bright prospects. The clean energy sector, for example, is one of them. And it is also in that area that China-U.S. interests seem to converge.

On Jan. 18, China’s Ministry of Commerce spokesperson Yao Jian made it clear that China hopes to expand its imports of energy saving and environmental protection products and technologies from the United States, Europe and Japan. In the meantime, he also urged the United States to relax its hi-tech exports to China and boost its cooperation with China on energy saving and environmental protection technologies.

However, trade, as Yao described in a previous press conference, is no more than “the tip of the iceberg” in the much bigger picture of the China-U.S. economic relations. The focus on the U.S. trade deficit with China could hinder bilateral cooperation in other areas, such as the fiscal, investment and service sector.

Encouraging outbound investment is part of China’s efforts to exploit the potential of its 2.85 trillion U.S. dollars of foreign exchange reserves and balance its international payments. Only less than 1.4 billion U.S. dollars of the 59 billion U.S. dollars of Chinese overseas investment in 2010 has gone to the U.S. market. However, that is a surge of 81 percent over 2009, indicating a huge potential. Yao estimated that the growth this year could top 50 percent.

According to a report by China Daily on Wednesday, Ted Dean, chairman of the American Chamber of Commerce in China, also hopes that the upcoming meeting between President Hu Jintao and U.S .President Barack Obama could focus on “opportunities for cooperation,” such as “energy and climate change” where “interesting win-win solutions” are possible.

01/19/2011 Source: Xinhua

The value of China’s currency seems to have been thrust into the spotlight again recently in world media agencies, which are focusing their lens on Chinese President Hu Jintao’s high-profile visit to Washington between Jan. 18 and Jan. 21. However, is such a focus on yuan misplaced in the context of multi-faceted China-US economic ties?

“It’s not justified that the yuan has been on the top of the China-US economic agenda,” said Lv Suiqi, deputy chairperson of the Department of Finance of Peking University. Instead, “they should pay much more attention to areas where their common interests are at stake.”

The reason for the yuan’s now de facto primacy on the U.S. agenda of its economic or even political policy towards China is that the appreciation of the yuan has been deemed as an “immediate and effective solution” to the U.S. economic problem, said Li Xiangyang, an expert at the Chinese Academy of Social Sciences.

But that is no more than a “short-term” solution and its effect is “uncertain and suspicious,” Li noted. While the global financial crisis has devastated U.S. domestic consumption, the most important engine for the U.S. economy for years, it is not realistic for the United States to improve its competitiveness in a short time. In that context, President Obama pins hopes on exports, pledging to double the U.S. exports in five years.

The United States has also argued that a strong U.S. economic recovery will in turn benefit the world economic rebound as a whole. That is also the claim that the U.S. government has used to defend its second quantitative easing action, which pumped 600 billion U.S. dollars into its economy and has been criticized as a quasi-devaluation of dollar. It also has added inflation risks to emerging economies like China.

However, whether the dollar devaluation could boost the U.S. economy and the global economy remains controversial and doubtful both theoretically and empirically, Li said. The real solution, he added, lies in the development of new growth engines.

Indeed the Obama administration has already taken actions to encourage some emerging sectors that show bright prospects. The clean energy sector, for example, is one of them. And it is also in that area that China-U.S. interests seem to converge.

On Jan. 18, China’s Ministry of Commerce spokesperson Yao Jian made it clear that China hopes to expand its imports of energy saving and environmental protection products and technologies from the United States, Europe and Japan. In the meantime, he also urged the United States to relax its hi-tech exports to China and boost its cooperation with China on energy saving and environmental protection technologies.

However, trade, as Yao described in a previous press conference, is no more than “the tip of the iceberg” in the much bigger picture of the China-U.S. economic relations. The focus on the U.S. trade deficit with China could hinder bilateral cooperation in other areas, such as the fiscal, investment and service sector.

Encouraging outbound investment is part of China’s efforts to exploit the potential of its 2.85 trillion U.S. dollars of foreign exchange reserves and balance its international payments. Only less than 1.4 billion U.S. dollars of the 59 billion U.S. dollars of Chinese overseas investment in 2010 has gone to the U.S. market. However, that is a surge of 81 percent over 2009, indicating a huge potential. Yao estimated that the growth this year could top 50 percent.

According to a report by China Daily on Wednesday, Ted Dean, chairman of the American Chamber of Commerce in China, also hopes that the upcoming meeting between President Hu Jintao and U.S .President Barack Obama could focus on “opportunities for cooperation,” such as “energy and climate change” where “interesting win-win solutions” are possible.

1/27/2011  Source: People’s Daily

Chinese market “cash cow” of the US

Since the beginning of the new year, American companies one after the other have proposed their new policies of investing in China. General Electric Company (GE) will invest more than $2 billion to sharpen its research and development in China with several new innovation centers and joint ventures; P&G has announced that they will in five years add another $1 billion in China; Ford Motor Company said they would further expand their production this year; Caterpillar Inc will build new joint ventures to boost their spare parts business in China; Starbucks has confirmed that their coffee shops in China will reach as many as 1,500 by 2015; The Carlyle Group will raise money specially to be used in China.

Intel China is no exception. According to Ge Jun, Executive Director of Intel China, the Chinese government is pushing the integration of the “three nets” (namely, telecom, computer and cable TV networks) and the development of Internet of Things (IoT). This undoubtedly will provide new opportunities to the US IT industry. Since Intel’s settlement in China in 1985, China has become its second largest market outside of its homeland.

According to statistics from China’s Ministry of Commerce, by the end of 2010, the US had invested in more than 59,000 projects in China with a total of $ 65.22 billion. China is becoming a “money spinner” to US companies. A survey by the Chinese American Chamber of Commerce said that 71% of the US-funded ventures made profits in 2009 and 46% of them gained a higher profit ratio in China than they did in any other country.

Since joining the World Trade Organization (WTO) 10 years ago, all the 100 service institutes China pledged to open have accepted US investment. In areas such as accounting, banking, insurance, security and commerce, US companies are making big money and are running very well.

Currently, China is the second largest trade partner and the top growing export market of the US. According to Chinese Customs, the volume of Sino-US trade in 2010 was $385.34 billion with a nearly 30% annual increase. In 2010, China’s import volume from the US was $102.04 billion with an increase of 31.7% year–on-year.

Looking back, we can be clearer about the surge of US exports to China. According to US Department of Commerce statistics, from 2001 to 2008, US goods exports to China rose from $19.2 billion to $71.5 billion, an increase of 272 percent, while US exports to other countries and regions increased by only 72 percent during the same period. In the service trade, the US has retained a surplus of service exports to China. In 2009, the US had a trade surplus of $7.43 billion, about four times that of 2001.

By enjoying a rapid increase in US exports to China, the US has gained the dividends from China’s economic growth. All the states have benefited in real terms, making China appear on the top five export markets list in 40 states out of 50. Over the past 10 years, there has been a 330 percent increase in US machinery and agricultural produce exports to China, far beyond the increase of 29 percent in its exports to other regions of the world. China has become the largest single overseas market of US-produced soybean and cotton as well as an important export market for cars, airplanes and other machinery products. A report from the United States-China Business Council (USCBC) in 2010 said, “China continues to be an important export destination for US manufacturers and farm owners during the global economic recession.” Zhou Shijian, a senior researcher with the Center for US-China Relations (CUSCR), Tsinghua University, also acknowledged that without a surge in exports to China, the US President Barack Obama’s ambitious plan of doubling US exports over the next five years seems hard to achieve.

The US benefits from trade and economic cooperation with China – from consumers’ interests to job opportunities

US beneficiary of Sino-US trade cooperation

Besides direct benefits from exports to and investment in China, cooperation with China is also a boon for the US macro economy, as is demonstrated by US consumers’ interests.

Statistics show, of all China-made products entering the US market, daily consumer goods such as clothes, shoes, socks, toys, suitcases and electronic products account for about 75 percent. These quality products with low prices have greatly improved Americans’ lives, expanding their choices while shopping and bringing real benefits, especially for low-income groups. It has also led to a relatively low inflation rate for the US economy faced with pressures of fiscal and trade deficits.

According to a research by the US company Morgan Stanley, each American could save more than $300 in their expenses by purchasing goods from China in 2009. According to a study by the US-China Business Council, the gross domestic product (GDP) in the US should have risen another 0.7 percent by 2010 due to its increasing investment in trade to China, while the prices should have fallen by 0.8 percent. Adding the two research results, the disposable income of each US household should rise $ 1,000 every year. “Goods from China meet the demand of American consumers and will help stabilize the US market price, reduce the risk of inflation and maintain economic stability,” said Liu Haiquan, head of the Comprehensive Department of China’s Ministry of Commerce.

Sino-US economic and trade cooperation have also effectively increased US jobs. US Secretary of Commerce Gary Locke said in a speech given to the US-China Business Council in January last year, “If we just boosted our exports to Asia by one percent, that would support another hundred thousand (10 million)new jobs in the United States.” Accordingly, US exports to China from 2001 to 2008 provided the country with 2.57 million new job opportunities. Direct investment from Chinese companies to the US has also increased dramatically in recent years, making positive contributions to local employment. Some Chinese giants such as COSCO, CNPC, Lenovo, have brought a lot of employment opportunities as well as economic and social benefits to local residents in the US. The Haier Group created thousands of new jobs for Camden City since its establishment of industrial parks in South Carolina in 1999. In every ten Camden families, you can find at least one person working as a Haier employee. The city thus developed into a “hometown” of household appliances with an annual output of more than 20 million products. The WanXiang Group had nearly 30 projects invested in the US, creating nearly 5,000 new jobs. In the year 2009, when many US enterprises cut jobs, the WanXiang Group created a number of new jobs for Illinois through their new investment projects.

Sino-US economic and trade cooperation is the result of the increasingly international nature of the globalised trade market. The United States could use this to their own benefit, combining their advantages in financing, technology and management with China’s abundant labor resources.

Therefore, the international competitiveness of US products and US enterprises could be improved and the US industries’ share in the international market could be expanded. At the same time, the move creates the conditions for US industries’ transfer to high value-added sectors. Take computer manufacturing for example, China produced 150 million computers in 2008, with almost all the chips used in the central processors imported from US enterprises such as Intel or Advanced Micro Devices.

China is now the largest holder of US Treasury bonds. According to statistics released by the US Department of the Treasury, as of October 2010, the balance of US Treasury bonds held by China reached $906.8 billion. During the global financial crisis, China did not trim its holdings of US treasury bonds, but increased them. The move is important for the United States if it is to maintain a stable and mobile financial market, ease its credit crunch and promote trade financing, beneficial for the country’s goals in macroeconomic regulation. A report released by the US Congressional Research Service Bureau in July 2009 pointed out that if China did not purchase US bonds on a large scale, US interest rates would increase by 0.5 percentage points. Accordingly, the US can save itself $61.6 billion on bond interest payments.

China has a huge favorable balance of trade? The exchange rate of RMB is undervalued? Be rational when listening to discordant voices from the US.

To be rational over biased views

Though having gained huge profit from Sino-US economic and trade relations, the US has been questioning China’s favorable balance of trade and the undervaluation of the RMB exchange rate. What are the true facts?

Based on past statistics, China has only had favorable balance of trade for a short time, and it usually accounted for less than 3% of GDP. Only until 2005 did the favorable balance of trade increase. Despite this, the figure was much smaller than that of major trading nations such as Japan and Germany. For example, since 1952, Germany has had 58 years of favorable balance of trade, which was up to 8% of GDP at its highest. Some Gulf countries have also had a favorable balance of trade for a long time because of a lack of resources. Differences over statistics calculation have also led to the overrated unfavorable balance of trade of US to China.

The fact that China has had a favorable balance of trade against the US does not harm the interests of the US. Not only did China profit from it, but US companies also did, because of from the added value of imported products from China.

American think-tank CATO Research Institute pointed out in its report in 2010 that the international division of labor between China and the US is like a “smile curve” –the US has dominated the prophase manufacturing process such as high-profiting trade marks and concept designs, and final phase service including logistics, sales and market developing; while China has only undertaken low added value middle-phase manufacturing. The US is the lion’s share from Sino-US trade according to the profitability ratio. The added value of the products which China has made only accounts for 1/3 to 1/2 of the total export volume to the US.

According to the Economist, an iPod tagged “made in China” is sold in developed countries (“America”) at $299, of which “Only $4 stays in China with the firms that assemble the devices, …$160 goes to American companies that design, transport and retail iPods.”

The foreign exchange rate is another hot issue in Sino-US economic cooperation. Some Americans believe the currency value of Chinese RMB is severely underestimated, and the underestimation is the main cause of imbalance of bilateral trade. They hope that with the RMB’s appreciation and the US dollar’s depreciation, US exports and the economy will be boosted.

But in fact, RMB exchange rates have increased by about 25% since the reform of the exchange rate regime in 2005. RMB has increased to a larger extent compared to the US dollar, euro, Japanese yen and sterling. It is totally groundless to assume US’s trade deficit against China has anything to do with RMB’s value being underestimated. China’s foreign trade surplus surged from 2005 to 2008, during which time the RMB had appreciated by 21.2% against the US dollar, said He Weiwen, dean of Sino-US Commerce Research Center at University of International Business and Economics. Why does this phenomenon exist if the RMB is underestimated?

There are other cacophonies. The US has repeatedly heckled China with anti-dump and anti-subsidy investigations, protection of IPR and China’s policies of indigenous innovation. Many more frictions in bilateral commercial ties have occurred lately. If such problems are not solved, they will have a direct impact on the interests of US companies and US people, as well as hindering the economy of “made in China”.

An example is the special protection of tires, launched in 2009 against China. What was the consequence, then? According to data from the US, the price of US-imported tires increased by 30% in the first half of 2010, whereas the jobs offered by its tire industry dropped by 10% in the first five months of the year.

Meanwhile the US controls exports to China in the high technology industry. The control causes US enterprises to lose many opportunities, because China has to import the products from other countries. According to data from China, the value of high technology products imports grew from $ 64 billion to $ 309. 9 billion during 2001-2009 and the average growth per year was 48 percent. However the proportion of US products fell from 18.3 percent to 7.5 percent. If the US keep the level at 18.3 percent, it can increase the value of exports to China to $33.5 billion from 2009 .

Wide Prospect, Deep Cooperation

- To develop a win-win China-US Commercial Relationship

The US is the largest-scale developed country; China is the largest-scale developing country and the largest emerging market. The commercial cooperation between China and US produces giant benefits. The gap in development between the two countries and win-win cooperation are the basis for the steady development of a China-US commercial relationship. During the process of globalization, China and the US have began to share many benefits. A win-win China-US commercial relationship is good for the people of the two countries and will continue to cement and push the bilateral relationship.

There is an opportunity for cooperation on trade between China and the US . China is currently accelerating in terms of industrialization and urbanization. The mode of development is being regulated. The long- term goal is to widen the domestic need. All those elements will cause giant investment need and consumption need. China has the highest number of exports and the second highest number of imports in the world and may become the largest domestic consumption market. That means better opportunities and more development opportunities for the US.

Gao Ruibin, president for Motorola, Inc. China said that Motorola have invested $1.5 billion in research and development in China and they have 2700 people working on this. “The better China develops, the more chances for us. Motorola has an optimistic view on the China market and hopes to take part in the innovation in China.” Gao said. It is reported that many multinational enterprises such as GE, IBM and Coca Cola all take part in and support China’s national stratagems such as the change in economic development, energy saving and carbon emission reduction.

“The Chinese government will continue the trade policies of maintaining a basic balance between imports and exports to further deepen the opening up, reform and innovation of China and will make it easier for domestic and foreign investors by creating a more open and optimized investment environment for them. Foreign enterprises including those from the United States, will share the growing market pie with Chinese enterprises, “an official with China’s Ministry of Commerce said.

Experts say that the great achievements of Sino-US economic and trade cooperation are the result of much hard work. The United States should adhere to the concept of free trade and oppose protectionism in all forms of trade and investment.

It should re-evaluate and relax export control measures against China as soon as possible and properly carry out a foreign investment review to reduce unnecessary constraints and promote the investment and cooperation.

Experts also suggest that the United States and China should continue to strengthen macroeconomic policy coordination so as to jointly promote the balanced and sustainable development of the world economy.

Now is a critical period for the deepening development of Sino-US economic and trade relations. The healthy development of China-US economic and trade relations will help to promote stable economic growth and the global economic recovery. And only from a strategic and long-term perspective and through the continued promoting of Sino-US economic and trade ties, can greater improvements to the lives of the people from both counties and even the world be achieved.

At a new historical start, we are full of confidence in the future of economic and trade cooperation between China and the United States.

11/30/2010 Source: Xinhua

As a currency phenomenon in nature, inflation in China, like that in any economy, is pushed by the excessive money supply on the market. While it is necessary to tighten the monetary policy, as what China is doing now, it is also important and possible to create more investment opportunities to benefit from the excessive liquidity, People’s Daily reported on Monday.

The mounting pressure of excessive liquidity on the economy comes from both internal and international markets. Between 2003 and 2009, the growth of China’s M2, the broad measure of money supply including cash in circulation and all deposits, is 2.8 percentage points higher than that of GDP plus CPI. That gap widened to more than 9 percentage points between 2008 and the third quarter of 2010. As a result, China has the world’s largest money stock, reaching 10 trillion U.S. dollars.

The inflation expectation has been further fueled by the latest quantitative easing move by the U.S. Federal Reserve, which declared it will pump 600 billion U.S. dollars into its economy. The People’s Bank of China, the central bank, has taken measures to rein in the liquidity. Commercial banks are required to raise their deposit reserve ratio to an unprecedented high level of 18 percent.

However, that is only one side of the coin. A huge economy in the process of industrialization and urbanization like China needs a strong financial powerhouse, which means the possibility of using the money more effectively.

The real economy, for example, still needs more investment. The problem, however, is that market access to some lucrative industries, including transportation, telecommunication, energy, utility and financial services, is too high for non-public enterprises. As a result private capital has made speculative attacks on property or commodities, even garlic and cotton. In that sense, the solution is to break the monopoly of state-owned enterprises in those sectors and give more opportunities to private capital.

In addition, there is a big regional disparity in terms of the capital pool. The eastern part of China holds 60 percent of the bank loans, while the rest of the country, including the central-western regions and northeastern areas, share the remaining 40 percent. About 80 percent of the loans have gone to the urban areas.

China’s outbound direct investment only accounts for 1.3 percent of the world’s total FDI. More capital flow to the mid-western area and more Chinese capital outflow will not only reduce the liquidity pressure within the country, but also will facilitate the transformation toward a more balanced growth model.

A more diversified, more developed financial sector also helps absorb excessive money. It is a good opportunity to make a bigger, stronger financial market.

The paper recognizes the difficulty in any quick effect of those measures. However, given the prospect of excessive liquidity for a long-term period in China’s economy, it is urgent to take actions immediately to take full advantage of the liquidity, according to the paper.

11/24/2010 Source: People’s Daily

The excessive liquidity as a result of the domestic and international loose monetary environment is building up a challenging situation for China’s macro-control efforts for its economy. On Monday, People’s Daily called for relaxed control on China’s current account to encourage more outbound investment by Chinese enterprises to curb the speculative attacks on China’s agricultural prices.

On one hand, there is apparently too much liquidity on the market thanks to China’s two-year moderately easy monetary policy and proactive fiscal policy. On the other hand, China’s market is increasingly appealing to foreign capital given the expectation that China’s currency will appreciate and the United States’ recent quantitative easing action.

Hot money is flooding into China. The Ministry of Commerce of China has found that the actual use of foreign investment over the first 10 months of the year soared by 48 percent, much higher than the general growth of foreign direct investment in China in the same period.

The role of the hot money in agricultural products is even more worrisome. This year has seen speculative capital attacking garlic, ginger and cotton on the Chinese market, pushing the prices of those products sky high.

Food and housing accounted for 90 percent of China’s staggering consumer price index, the indicator for inflation, which rose to a 25-month high of 4.4 percent in October. Concerns about China’s ability to control inflation and uncertainty over monetary policy prevailed in the market.

There are suggestions for more stringent monitoring and control on international capital inflow. However, that is very difficult and not enough, said People’s Daily. China has become the second largest trading nation and the first exporter of goods in the world, with its foreign trade in goods accounting for one-tenth of the world’s total. That extremely close connection with the world market makes it easy for hot money to find access into China — through trading credit and foreign direct investment for example — but difficult to be identified and prevented.

Fewer restrictions on foreign exchange under the current account should be adopted, according to People’s Daily. That can encourage more private Chinese companies to tap the international market. The more capital outflow as a result can hedge against the hot money inflow.

In addition, a more flexible, market-oriented yuan exchange rate should be established by improving the yuan exchange rate formation mechanism.

Those measures targeting hot money from outside should, according to People’s Daily, be complemented by more effective control of domestic liquidity through a mix of policy tools like bank deposit reserve and credit control.

China has recently raised commercial bank’s deposit reserve to 18 percent, the highest in the world.

The paper also highlighted the importance of watching closely the investment activities of foreign companies in China. Most of those foreign companies are operating with a view for long-term development in China. However, more supervision should be taken on any speculation.

11/22/10 Source: Xinhua

The fluctuation range of China’s currency exchange rate can be further broadened to help curb rising inflation, Li Daokui, a member of the monetary policy committee of the People’s Bank of China, said at a forum on Saturday.

“The rapid price rises that the country faces are largely propelled by increasing costs instead of surging demand, leaving room for the Chinese yuan to appropriately appreciate to counter the rising prices of international commodities,” Li said at the China Macroeconomic Forum held at Beijing-based Renmin University of China.

Earlier in October, he said China can afford an annual 3 to 5 percent appreciation of the yuan. “Of course, the pace of the yuan’s appreciation should be based on domestic factors,” he said, adding the country’s reliance on external demand has declined somewhat this year.

He predicted China’s trade surplus would drop from $190 billion in 2009 to $180 billion this year, accounting for 3.5 percent of the country’s estimated gross domestic product (GDP) in 2010, a noticeable reduction from the pre-crisis level of 7.9 percent.

Commenting on another change in the country’s economic growth pattern, he said domestic consumption has started to play a leading role among the driving factors that determine China’s GDP, further reducing the country’s dependence on exports.

Consumption is expected to account for 55.4 percent of China’s GDP in 2010, overtaking investment for the first time as the biggest driver of economic growth, according to a report released on Saturday by Renmin University of China.

“That shows the government’s efforts to shift the momentum of its economic growth from external to domestic demand, especially consumption,” said Liu Yuanchun, deputy head of the university’s School of Economics.

A nominal year-on-year increase of consumer goods sales will reach 18.3 percent this year and maintain a growth rate of 17.8 percent in 2011. “China has stepped into a consumption-driving time,” the report said.

It said the growth rate of China’s GDP will amount to 10.1 percent in 2010, before slowing down to 9.6 percent next year mainly due to monetary-tightening policies, declining external demand, and measures to cool the real estate market and heavy industry.

“The year 2011 will be the most complicated year for macroeconomic management,” Liu said, urging the government to make curbing inflation its top priority next year.

He said the Consumer Price Index (CPI), a key gauge of inflation, is likely to show year-on-year growth of 3.2 percent this year, possibly slowing down to 3 percent in 2011, and that an annual 3 percent increase in the CPI could be expected in coming years.

China’s CPI surged 4.4 percent in October from a year earlier, reaching a 25-month high, according to the National Bureau of Statistics. Some analysts have predicted the figure may rise to nearly 5 percent in November.

The central bank lifted reserve requirements for banks on Friday evening, the second time in nine days, to soak up superfluous liquidity and cage the inflation tiger.

The State Council, China’s cabinet, over the weekend also ordered local governments to take steps to rein in surging food prices, which usually account for one-third of the country’s CPI.

Among the central government’s other recommendations, local authorities were encouraged to boost production to ensure supplies are adequate, while checking irrational demand and punishing illegal activities that push prices up. Reducing the cost of agricultural products and providing temporary subsidies were also urged as measures.

From Dec 1, highway toll stations are forbidden from collecting fees from vehicles being used to transport fresh agricultural products, according to a circular on the central government’s website.

Local governments must also disburse subsidies temporarily and establish coordinated social-security mechanisms that are capable of providing gradual rises in basic pensions, unemployment insurance and minimum wages, the circular said.

Liu said rising vegetable prices could be absorbed by the market in two months, while grain price hikes could be balanced in eight months.

10/14/2010 Source: Xinhua

The People’s Bank of China reported on Oct. 13 the country’s fastest quarterly growth of foreign exchange reserves since the beginning of year, sparking concerns over the possible impact on China’s economy brought by hot money rushing in.

In the third quarter of 2010, China’s foreign exchange reserves rose by 194 billion U.S. dollars, witnessing a much higher growth rate than in the previous two quarters.

Hot money, referring to the short-term flow of money into a country to take advantage of favorable interest rates, is thought to be responsible for the rapid growth in foreign exchange reserves.

“Under the shadow of a global currency war, yuan assets can provide the greatest safety and is the most attractive to international investors,” said Guo Tianyong, head of the China Banking Research Center at the Central University of Finance and Economics.

The value of yuan hit a new high against U.S. dollar Wednesday as the central parity rate of the yuan was set at 6.6693 per U.S. dollar on Oct. 13, according to the data released by the China Foreign Exchange Trading System.

Data from China’s customs showed that the country’s trade surplus in the third quarter was only 65.3 billion U.S. dollars.

Zhao Qingming, a researcher with China Construction Bank, said that the appreciation of the euro against the U.S. dollar was another reason for rapid growth of foreign exchange reserves.

In September, funds outstanding for foreign exchange stood at 289.6 billion yuan, which is around 43.5 billion U.S. dollars, maintaining its upward trend.

“It indicates the accelerating influx of hot money in the context of expectations of a stronger yuan and higher asset prices,” explained Zhuang Jian, a senior economist with the Asian Development Bank.

“The recent rise in bulk commodity prices and housing prices are both signs of the hot money influx,” Zhuang said.