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State of the Nation

State of the Nation
 
     
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Containment Operation

Despite numerous measures to curb inflation, problems continue as increases hit a 34-month high this May. The consumer price index (CPI) and the producer price index (PPI), two key gauges of inflation, surged - CPI up 5.5 per cent and PPI up 6.8 per cent from the same time last year.

This has forced China to raise the reserve requirement ratio for the sixth time this year to a record 21.5 per cent of deposits. Although some analysts believe that tightening may ease over the coming months as commodity prices fall, there is real risk of a ‘hard landing’ for China. Acclaimed economist George Soros believes that China’s formula for the economy and curbing inflation is “running out of steam.” Respected New York-based economist Nouriel Roubini also believes that, whilst a hard landing is unlikely in the next few months, it could well happen after 2013 thanks to China’s over-investment of GDP in projects such as infrastructure.

The fears of a hard landing have likely been eased somewhat with the announcement of a trade surplus in China of US$13 billion. This is smaller than expected, and suggests that China’s consumers are beginning to pick up the slack from exporters.

 

Investment Optimism

Despite the struggles to contain inflation and fears that China will lose control of rising prices, there is somewhat better news for foreign investors. China has announced that it will issue rules on RMB-denominated foreign direct investment (FDI) into the mainland before the end of this year. Currently, FDI in RMB needs case-by-case approval from the authorities.

It is believed such a move will allow easier repatriation and could slow the growth of the offshore RMB pool. This is the next logical step in the internationalisation of the RMB, which will make foreign investment into China far simpler for many businesses.

Rare Earth Control

Tightening of inflationary measures is not the only area where China is taking further control of its finances. Already holding about 95 per cent of world’s rare earth elements, China is now looking to reduce export quotas further and consolidate the industry. This has already begun in Southern China, with three companies set to be named to account for 80 per cent of the ion absorbed-type rare earth market in the region. This news has caused prices of some rare earth materials to double in the space of a month.

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