A Viable Market for Inflation-Linked Products in China

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A Viable Market for Inflation-Linked Products in China

How serious is the inflation in China? According to official statistics, inflation rate in China is about 3%~4% at present, which seems very moderate. But this result contrasts with the feeling of Chinese people and is considered incredible. Other evaluation methods are proposed by economists, showing quite different outcomes. In the report Research of the inflation degree in China, Yanchen Qi selected prices of diesel and corn as samples and reached the conclusion that current inflation rate is nearly 30%. In addition, the compound inflation rate from 2000 to 2011 can be estimated using the price of pork, which increased from RMB 6 to RMB 15 per kilogram, with a compound inflation rate of 9.6%.

What causes the inflation? External Factors Subprime mortgage crisis. This has led to the implementation of quantitative easing monetary policy in mainstream global currency markets, especially the Federal Reserve Bank (QE1 and QE2 totalled 2.3 trillion dollar). Its influence to China has two main aspects: Firstly, massive inflow of hot money. China's economic stability and prosperity gives a strong expectation of RMB appreciation. As a result, hot money flows into China through false declarations of trade, FDI and underground banks, pushing up asset prices. Secondly, “Dollar Flooding” forces China to increase money supply passively because exchange rate mechanism is not fully marketoriented, bringing about asset price inflation and price increase. Debt crisis in Europe and the USA has the same impact on China’s inflation. Imported inflation caused by high demand of commodities. In recent years, China’s dependence on foreign imports of commodities (such as oil and iron ore) has experienced a sustained growth. With the continued depreciation of dollar, the prices

of dollar-denominated commodities are rising…...

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