As the summer heat kicks in, the temperature of the Chinese economy is also rising. A report this week by Industrial and Commercial Bank of China (ICBC) says China's ongoing battle against inflation – the government has targeted reducing inflation as a key goal for 2008 – will continue into 2009. Consumer prices officially rose 7.7 per cent year on year in May – slightly down from April's 8.5 per cent rate rise, but well above the government's 2008 inflation target of 4.8 per cent.
China's largest lending bank also predicts that Chinese stock markets will continue to "seesaw during 2010 and 2011." Between 2009-2011, the report states, liquidity should "remain abundant," but "the possibilities of temporary liquidity shortfalls would increase." The report concludes, "the major task of China's economic control remains curbing inflation and reducing risks of serious economic fluctuations."
One on-radar "serious economic fluctuation" is speculative investment. This week, the government said it will intensify controls on the inflow of hot money, after announcing that FDI had increased to USD52.38 bn in the first six months of 2008. This represents an increase of 45.5 per cent year-on-year, but the concern is that much of this investment is short-term speculation based on China's strengthening currency, the yuan – and is further stoking inflationary pressures. The result will be new controls on FDI, including tightened monitoring of trading activity and investment registrations, in the latter part of the year.
Global economic conditions may actually assist this process, as the knock-on effects of slower export orders for manufactured goods could dampen the yuan's steep gains so far in 2008. Some economists are predicting an end-of-year dollar-yuan rate of around 6.7, down from earlier projections of a possible 6.5 exchange rate by year-end.
Either way, the modulation of China's economic thermostat is entering a new phase.
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