Control Measures Added One by One    

The 6.5% growth of the CPI (consumer price index) in October motivated the PBC, the country's top financial management authority to increase the deposit-reserve requirement rate for commercial banks by 0.5 percentage points to an all-time high of 13.5%. This is the ninth increase this year. PBC explained that it aims to slow down the rapid credit growth and recover fluid money. When the IPO of PetroChina Company Ltd. in October caused a temporary tight supply of cash, PBC put RMB161 billion cash into the public market, interrupting the pace of the process of recovering fluid money.
   Also in October, the National Development and Reform Commission (NDRC) issued a new allowance for the calcium carbide manufacturing industry. In November NDRC issued a new permit for the chlor-alkali (including caustic soda and polyvinyl chloride) industry, effective December 1st, 2007. The thresholds refer to newly applications to initiate projects for new plants or expansions in the affected industries. Moreover, NDRC also ordered the shutdown of existing production units in the calcium carbide and coking industries that cannot meet conservation requirements for energy and  environmental quality. All of these show the governments' intent to control heavily investment in consuming energy- and resource-intensive products.   
   The surplus in foreign trade continues to increase the deposit of foreign exchange for China, bringing more and more pressure on the valuation of RMB. An official analyst suggested that the high ratio of exports to imports may be mainly due to the trade mode of processing imported materials then exporting. In this mode, most profits are not enjoyed by Chinese citizens, the analyst commented.  
   After issuing the new policy for the consumption of natural gas, NDRC announced a 50% increase in the price of natural gas supplied to industrial users, rising to RMB1.2 per cubic meter, effective November 10th. Such a measure will help control the irrational consumption of natural gas. PetroChina Company Ltd., CNOOC and Sinopec Corp., China's top three suppliers of gas, will benefit from the price increase. Such an action does not play a supporting role in the government's effort of controlling CPI.
   Because the surging crude oil price is narrowing the margin of heavy industries, in particular chemical makers, more and more chemical companies have switched their focuses to the coal chemical business, although the Chinese government does not support substituting coal for oil. Some chemical makers have started to acquire coal mines. Even if they are not ultimately allowed to start coal-to-oil/olefin/DME business, they can minimize costs by getting coal from their own mines.  
   According to statistics of WIND, the cumulative revenue achieved by publicly listed chemical makers reached RMB227 billion in the first three quarters, up 22.68%, with profits totaling RMB11.265 billion, up 83.9%. Chemical fiber manufacturing, basic chemicals manufacturing and specialty chemical manufacturing outpaced all other chemical segments.

   Zhong Weike
November 18th, 2007