TO THE POINT: China is becoming more expensive. Rising food and housing prices are emptying peoples' wallets, while at the same time more money has been flowing into China through foreign trade or through investment. The consumer price and producer price indexes both hit their highest points in history, forcing the central bank to raise the reserve requirement ratio once again, also to a record high. Amid wide speculation over a coming interest rate hike, the mainland stock market experienced its largest one-week loss ever in early November, but was recovering gradually going into mid-month.

By LIU YUNYUN

Numbers of the Week 4.8 trillion yuan From October 16 to November 13, the market value of the yuan-denominated A shares decreased 4.83 trillion yuan ($648.3 billion), from a peak 35.6 trillion ($4.8 trillion) to around 30 trillion yuan ($4.03 trillion). At the same time, the average price/earning ratio decreased from 46 to around 40. 10% The Ministry of Finance ordered local governments to spend no less than 10 percent of the money earned from land sales on cheap-rent apartments and affordable residential units, with the intention of helping the poor.

Too Expensive to Live

Chinese housing prices kept accelerating in October, growing 9.5 percent over the same time last year and 1.6 percent higher than September.

The National Bureau of Statistics (NBS) also revealed that Ningbo (19.1 percent), Urumqi (18.5 percent), Beijing (17.8 percent), Beihai (17.7 percent) and Shenzhen (16.8 percent) topped the growth chart of the 70 large and medium-sized cities surveyed in terms of newly built residential units.

Prices of second-hand residences were already increasing substantially, up 8.7 percent year on year, with Shenzhen (21.1 percent), Ningbo (15.6 percent), Urumqi (13.5 percent) and Beijing (11.7 percent) taking the lead.

The citizens who do not own residences have been complaining of the surging rental prices, while others who own residences did not think the same way. The government has been caught in the middle. Each time it has come up with a new tightening measure, housing prices have soared defiantly.

The real estate industry is a pillar in the country's economy. It is widely suspected that housing prices will continue to climb amid concerns about the overheating economy.

Rate Hike Re-Run

As expected, the banking reserve requirement ratio was raised to its highest level in history. As of November 11, banks had to reserve 13.5 of their money in the central bank.

Up to now, the rate has been raised nine times this year. About 200 billion yuan ($26.85 billion) is expected to be squeezed out of the banks.

"Judging by the experience of other countries, the central bank can raise the rate another three times and 15 percent is the upper limit," argued Shen Minggao, a senior economist with Citibank China. Shen also believes 15 percent would exert substantial impact on managing excessive liquidity, but that the current rate was relatively moderate.

The Industrial and Commercial Bank of China (ICBC) expected the ratio to hit 15 percent next year. China's commercial banks are expected to lend out a total 3.8 trillion yuan ($510.1 billion) for the whole of 2007, compared with last year's 3.18 trillion yuan ($426.8 billion), said an ICBC report.

Another interest rate hike is expected to follow, but the timetable is not set yet.

Stock Market With Chinese Characteristics

For many stock investors, early November was a tale of two directions: the best, as well as the worst, of times.

The sharp up and down in the stock market caused many painful headaches. Some complained of being tied up in stocks, while others regretted missing the boat.

On November 8, the benchmark Shanghai Composite Index dove 4.85 percent to 5,328 points, then rolled down to 5,187 points on November 12, marking the biggest weekly loss in China's market history.

Observing the panicky atmosphere, the securities watchdog loosened constraints and gave approval to institutional investors to buy with a limited amount of money.

Unexpectedly, the Shanghai Composite Index rebounded 4.94 percent on November 14 to 5,412 points, marking the biggest single day rise in history.

Many factors triggered this round of downturns. China Securities Regulatory Commission issued its circular 44 to fund management companies requiring them to "control risks" on November 4. All those superstitious Fours signaled to fund managers that they must kill their stocks. Wide expectations of further government tightening measures also contributed to the loss.

Second, qualified domestic institutional investors (QDIIs) diverted some of their assets from the mainland market into overseas markets.

Third, many people have become more interested in futures as well as foreign exchange investment.

The gloomy performances of major world economies such as the United States and Japan added fuel to the already drooping mainland market.

Many retail investors also complained about PetroChina shares after the company's initial public offering (IPO) on November 5. Its share price rocketed to 48.62 yuan on the first trading day, almost triple the issuance price of 16.7 yuan. However, it dropped to 36 yuan on November 12, meaning the company's market value shrank 2 trillion yuan ($268.5 billion) in six trading days. Though "Asia's most profitable company" failed many of its Chinese investors, a strong rebound is expected.

The bullish stock market has lured many people to risk their life savings buying stocks. A central bank financial report stated in October that citizen deposits had decreased 506.2 billion yuan ($67.95 billion) year on year. The central bank estimated most of the money was put into the stock market to purchase IPOs.

The regulatory departments have warned of market risks though many have learned the hard way from this roller coaster period.

The continuous appreciation of the Chinese currency yuan and the booming trade surplus constitute a strong base for the next round of the bull run.

Important Economic Indexes

Consumer price index (CPI): China's CPI rebounded to its highest level of 6.5 percent in October. Yao Yingyuan, Chief Economist from the NBS, said the CPI is primarily driven by food prices and does not signal overall inflation.

The price index of food, a major driving force of the country's CPI, ballooned by 8.6 percent, compared with the growth rate of 1.3 percent for garments and 1.9 percent for daily commodities.

Yao said that only five of the eight consumer price categories factored by the NBS were on the rise in recent months, and only food prices were soaring due to structural growth. He determined there was no full-scale inflation yet.

Producer price index (PPI): China's October PPI rose 3.2 percent year on year, the fastest growth so far this year. The purchasing price of raw materials, fuel and power rose by 4.5 percent from a year earlier, the NBS report stated.

The PPI for means of production was up 3.1 percent and that of livelihood up 3.5 percent, said the report.

Foreign trade: In spite of all its efforts, China's trade surplus hit a monthly record high of $27.05 billion, according to the General Administration of Customs. The new high brought the total surplus in the first 10 months up to $212.37 billion.

Total import and export value in the first 10 months stood at $1.75 trillion, up 23.5 percent year on year, and tantamount to the whole value of last year.

Hu Xiaolian, Director of State Administration of Foreign Exchange, pointed out that the expansion of the trade surplus resulted from the strong export growth of high-polluting, high-energy consumption commodities, as well as some resource-based commodities.

Hu also said China will gradually open its capital accounts and make them convertible.

Money supply: In October, the country's broad measure of money supply, or M2, increased by 18.5 percent, while the banks offered 136.1 billion yuan ($18.27 billion) in new renminbi loans.

The rapid increase in money supply is due in part to the surging trade surplus, which forced the central bank to issue more yuan to buy the foreign currency.