China, Rising or stumbling? For China , the year 2011 started well enough.

Stocks rallied in major markets, growth moderated to sustainable levels and her bellicose ally, North Korea, has sought a softer, if not conciliatory stance against the South in her New Years message. However, 2 main issues are still unresolved from the previous year. Namely, they are the value of the yuan, and the inflation rate. The following paragraphs shall trace the latest developments that has occurred in the past week. According to the China Foreign Exchange Trade System, on Dec. 31, after earlier touching 6.5896, the yuan climbed 0.17 percent to 6.5897 per dollar. This is in line with the Chinese governments plan to allow a gradual appreciation of the yuan in order to reduce the impact of rising commodity prices through cheaper imports. A need to allow a rise in the yuan also includes the ability to better manage inflation, which is a major issue for the energy hungry nation. Having risen 3.3 percent against the dollar since June 2010, the yuans gain was still the least among emerging Asian currencies after South Koreas won and Hong Kongs dollar. Going forward, traders expect to see the yuan rising by as much as 2 percent in the first half of 2011. Although seemingly resistant to external calls to appreciate the yuan at a greater pace, the Chinese government is expected to underscore the great importance it places with the United States by letting the yuan strengthen at a faster pace due to Chinese President Hu Jintaos visit in mid-January.

Chinas inflation rate stood at 5.1 percent in November 2010. This increase follows a 4.4 percent increase in October and a 3.6 percent increase in September. Although above the governments target rate of 3 percent, the government has sought tightening measures through 3 measures: banks reserve requirement ratios, interest rate and exchange rate. Figure 1 shows the year-on-year changes in inflation rate (or known as CPI). The increasing inflation rate has been largely attributed to food prices, with an increase of 11.7 percent, whereas non-food prices only increased by 1.9 percent. This great increase has been mainly blamed on bad weather conditions, thereby restricting supply and not due to excessive demand. Within 2010 alone, central bank increased banks reserves requirements six times. As reiterated by the Chinese government, going into 2011, they (the government) will be keeping a close watch on the inflation rate in order to appease its populations unease over the increasing cost of living.

Inflation Rate (CPI)

6 5 4 3 2 1 0 Jan '10 Feb '10 Mar '10 Apr '10 May Jun '10 Jul '10 Aug '10 '10 Sep '10 Oct '10 Nov '10

Inflation Rate (CPI)

Figure 1

In conclusion, although off to a good start, China still has pressing macroeconomic issues to face, alongside several diplomatic tussles it is involved in, such as the inter-Korean tensions as trade disputes with the United States. Going into 2011, although faced with strong GDP numbers and solid purchasing managers index readings from previous quarters, social and political unrest and instability still threaten to derail Chinas ascent into a reliable and responsible economic powerhouse. The next issue will see an article covering on China projecting her influence and political clout over regional as well as international politics, and how this would affect the global economy.

Sources: Bloomberg.com, China's Inflation May Cool With Factory Slowdown, Export Earnings Program, January 3rd, 2011 Trading Economics.com, China Inflation Rate data Chinese Governments Official Web Portal Reuters.com, Yuan to rise 5 pct paper, January 4th, 2011-01-05 Bloomberg.com, Yuan Appreciation to Slow in 2011, Top Forecasters Predict: China Credit, January 4th, 2011