TO THE POINT: The Chinese economy is showing signs of overheating in every aspect: skyrocketing property prices, soaring stock prices, an ever-expanding trade surplus, fast-growing fixed assets investment, and on and on. The Chinese economy has fallen into a liquidity trap and the central bank has been attempting to revive normality, but so far hasn’t made any progress. The country is restructuring the steel industry, encouraging the listing of high growth companies and bringing more products to its futures market. By LIU YUNYUN

Liquidity Balance Era: But When?

The Chinese central bank has been caught in a liquidity whirlpool. On July 30, the central bank raised the amount that banks must hold in reserve by 0.5 percentage points-the sixth time this year. The bank announced that the hike was meant to “strengthen management of liquidity in the banking system and control excessive growth in money supply and credit.”

The increase in the reserve requirement ratio takes effect on August 15. Since the beginning of the year, the reserve requirement ratio has climbed from 9 percent to 12 percent.

The latest move followed the central bank’s decision to raise benchmark interest rates by 0.27 percentage points and cut the interest income tax from 20 percent to 5 percent on July 20.

Boosted by the ample money supply, GDP surged to 11.5 percent in the first half while fixed assets investments grew 25.9 percent. Part of the excessive money supply came from the ballooning trade surplus, which jumped 83 percent in the first half to $112.5 billion, while at the same time Chinese foreign reserves swelled to $1.3 trillion.

Finance professor Zhao Xijun with Renmin University of China said the ultimate solution to squeeze out liquidity is to reduce the trade surplus and achieve balance in international payments.

One Word: Plastics

Plastic futures (linear low-density polyethylene, LLDPE) premiered on July 31 at the Dalian Commodity Exchange in Dalian, a coastal city in northeast China’s Liaoning Province.

The move will help boost the development of China’s petrochemical industry, said Li Yongwu, head of China Petroleum and Chemical Industry Association.

Li said China has depended heavily on imported petrochemical products up to this point, though the start of plastic futures trading is conducive to hedging against risks for downstream enterprises in the petrochemical industry.

Shang Fulin, Chairman of China Securities Regulatory Commission, said that China’s futures industry is growing rapidly along with encouraging the ability of product innovation.

China launched its first futures exchange in Zhengzhou, capital of the central Henan Province, in October 1990.

Seventeen futures items are traded on the Chinese mainland: cotton, sugar, wheat, soybean, corn, LLDPE, copper, aluminum, natural rubber and fuel oil, etc.

According to the China Futures Association, Chinese futures markets in four exchanges--two in Shanghai, one in Zhengzhou and one in Dalian--recorded 14.5 trillion yuan in first-half turnover, a growth of 43.5 percent from the same period last year.

A Chinese NASDAQ

China will likely set up its own growth enterprises market in 2008, according to China Securities Journal. Relevant measures have been discussed and small and medium-sized companies with high growth momentum will be able to list in the Shenzhen stock market. The Shanghai stock market is intended to serve major listed companies, while the Shenzhen market is designated for small and medium-sized companies.

Private equity firms, once regarded as “underground money banks,” are believed to benefit the most from the introduction of this Chinese “NASDAQ.” The Financial and Economic Affairs Committee of the National People’s Congress has amended the Partnership Enterprise Law, a law that paved legal ground for private equity firms. Since then, Chinese private equity investors have been greatly encouraged and are working to establish their own firms. Foreign private equity firms have started to feel pressure from the establishment of domestic private equity firms.

Steel Facelift

Chinese steel companies are currently facing both good and bad news. Altogether 77 large and medium-sized Chinese steel firms saw their profits rise 108.75 percent in the first half, according to the China Iron and Steel Association (CISA). Their combined net profits grew to 78.274 billion yuan while sales soared 34.89 percent, year on year, to 921.26 billion yuan.