Statistics: FDI up 13%, inflation hits 11 year high

Two news stories catch the eye today. The more worrying concerns inflation. As this quote states:

China has a history of relatively mild price increases spiralling into double-digit inflation.

This should not be taken lightly. For all the governments pledges to "intervene" to ensure price stability the Chinese government should be warned that getting the cat back in the bag after it has been let out is not so easy. The problems with diesel shortages demonstrate this. Without price increases the suppliers of fuel are making a loss. So economics dictates that they will cease to supply fuel - result shortages. Therefore, it China wants the fuel to flow it needs to increase prices - firms need to make a profit or will shut. Capitalism (from which China has done so well recently) works both ways.

Moreover, there is nothing like a bit of food price inflation to really get the government worried about social unrest. A lack of food more than anything is liable to get people onto the streets. These are relatively large values for such staple foods.

Food prices rose 17.9 per cent in October from a year earlier, with pork up 54.9 per cent, fresh vegetables rising 29.9 per cent, and eggs up 14.3 per cent.

China inflation back at 11-year high[FT]

Chinese headline inflation rebounded to its highest level in more than a decade in October driven by soaring food prices, spurring expectations the central bank will continue taking steps to cool the red-hot economy.

The consumer price index rose 6.5 per cent in October from a year earlier, matching August’s 11-year high, after a brief reprieve in September when inflation dropped to 6.2 per cent.

../

He blamed global oil and food price increases and said the government would ensure price stability. ”We have methods to ensure supply, we will take many different measures to stabilise prices,” a report on the central government Web site quoted Mr Wen as saying.

China has a history of relatively mild price increases spiralling into double-digit inflation.

Food prices rose 17.9 per cent in October from a year earlier, with pork up 54.9 per cent, fresh vegetables rising 29.9 per cent, and eggs up 14.3 per cent.

Non-food inflation was 1.1 per cent, affected by the government’s decision to raise tightly controlled pump prices for petrol, diesel and jet fuel by 10 per cent in late October.

That was the first rise in 17 months and came in response to shortages that have spread across the country as refiners cut production in the face of huge losses resulting from the difference between record high crude prices and government-fixed pump prices.

Some parts of the country are still reporting diesel shortages that some have blamed on outlets hoarding supplies in the expectation of another price rise.

Higher oil prices helped push producer price inflation up to 3.2 per cent in October from a year earlier.

Analysts now expect the central bank to continue raising interest rates and to introduce more forceful measures to rein in bank lending, which expanded by the largest margin ever in October.

The central bank has already lifted interest rates six times this year and raised the proportion of deposits banks must hold in reserve nine times to an all-time high of 13.5 per cent.

On a more encouraging note, FDI inflows are higher again. However, such inflows can cause their own problems not least upward pressure on inflation and increasingly large foreign exchange rate reserves.

China's foreign direct investment up 13.2% in Oct. [The China Post]

BEIJING -- Foreign direct investment into China rose 13.2 percent in October compared with the same month a year ago, the government said Monday.

Foreign enterprises invested US$6.8 billion in China last month, the commerce ministry said in a statement on its website.

The figure was up from US$5.3 billion in September. In the first 10 months of 2007, foreign direct investment rose 11.2 percent from the same period in 2006 to US$54 billion, the commerce ministry said.

Last year actual foreign investment in China was US$69.5 billion, down 4.1 percent from 2005.

Foreign direct investment, along with booming exports, are among the top factors resulting in China's massive build-up in foreign exchange reserves.

The foreign exchange reserves, the largest in the world for more than a year, hit US$1.43 trillion by the end of September, according to the most recent data.

.