Nixon in China

10 January 2008 By Martin Hutchinson

By seeking to control food prices, China is attacking the symptoms of inflation, as Richard Nixon did in 1971. To control it properly, China should control its banks, and stop bailing out their bad loans through capital infusions from its foreign exchange reserves.

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China's cabinet has said it will temporarily intervene in the market to curb food price inflation. Retailers and producers will face heavy fines if they increase the price of basic necessities. Food prices climbed more than 18% in November, while the price of pork jumped more than 50%. Overall consumer prices rose 6.9% in November from a year earlier, an 11year high. The current People's Bank of China rate for one year loans is 7.02%.

RMB deposits in Chinese banks increased 16.84% in the year to September 30, M2 increased 18.45% and M1 increased 22.07%. RMB loans of Chinese banks increased 17.34% from a year earlier, while foreign currency loans increased 27.26%.

At September 30, China's foreign exchange reserves totalled $1,433.6bn, up 45.6% on the previous year.

China Investment Corp, the country's first sovereign wealth fund with $200bn in capital, has invested one third of its capital to purchase Central Huijin Investment Co., which owns controlling stakes in China's four largest banks. Safe Investment Co., owned by the State Administration of Foreign Exchange, on January 7 invested $20bn in recapitalising Development Bank of China prior to its privatisation; CIC is also expected to inject capital into the Agricultural Bank of China prior to its privatisation

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