In 2008, the global economy faced a "cold" period, marked by the U.S. subprime mortgage crisis that triggered a stock market crash. The economic slowdown was so severe and widespread that many people in China began to worry about a potential contraction in the domestic economy. There were even rumors that the central government might revise its "two defenses" policy—introduced at the end of the previous year to prevent rapid economic growth from overheating and to guard against a structural rise in prices leading to inflation. On February 18, 2008, the National Bureau of Statistics released new data that surprised many, as if it had been anticipated all along.
Among the most closely watched figures were two key indicators: first, the consumer price index (CPI) rose by 7.1% year-on-year in January, hitting a monthly high since 1997, largely due to factors like the Spring Festival and a snowstorm. Second, new loan disbursements exceeded 800 billion yuan in one month, setting a record for the highest monthly loan volume ever recorded. These two "new highs" made the "two defenses" strategy seem more urgent than ever.
But what exactly does "two defenses" mean, and how is it affecting the chemical industry? To explore this, we spoke with Yu Changbin, a researcher at the China Enterprise Development Research Center.
Reporter: Why is the central government concerned about prices shifting from structural increases to full-blown inflation?
Yu Changbin: According to the National Bureau of Statistics, the CPI in 2007 increased by 4.8%, up 3.3 percentage points from the previous year. In January 2008, the CPI rose to 7.1%, the highest level since 1997. A clear sign of inflation is a general increase in prices. When inflation exceeds 10%, it's considered serious. In 1988 and 1993, China experienced two major inflations, which left lasting memories of rising prices and economic instability.
Reporter: What are the main causes of inflation?
Yu Changbin: Globally, China’s inflation rate is much lower than that of other developing countries. However, rising prices of certain commodities on the international market have started to affect domestic prices. The oil crisis, the rapid expansion of bioenergy, and surging agricultural product prices are currently impacting the Chinese economy. These factors are interconnected.
Starting with the oil crisis, international crude oil prices surged to $100 per barrel in early 2008. This spike has significantly impacted production costs and energy prices. At the same time, the development of biofuels, such as ethanol, has increased demand for crops like corn. In the U.S., for example, the ethanol industry consumed a large portion of the country's corn supply, driving up food prices globally. This has led to sharp increases in meat, dairy, and other food prices worldwide, including in China, where food prices rose by 12.3% in 2007.
Reporter: How can the chemical industry respond to these challenges under the "two defenses" policy?
Yu Changbin: The second part of the "two defenses" policy aims to prevent the entire economy from overheating. Controlling investment trends is crucial to avoiding inflation. For the chemical industry, which is heavily capital-intensive, it's important to use tools like interest rates, exchange rates, and fiscal policies to manage investment growth. The industry must also adapt to tighter regulations and macroeconomic controls.
Reporter: What does "forced landing" mean in this context?
Yu Changbin: "Forced landing" refers to the government implementing strict macro-control measures to slow down economic growth. This includes reducing export subsidies, adjusting tax policies, increasing environmental costs, and tightening monetary policy. These steps aim to reduce trade surpluses and curb excessive investment.
Reporter: What impact will these policies have on the chemical industry?
Yu Changbin: Export tax rebates for chemical products have been reduced or eliminated, particularly for energy-intensive and polluting sectors. This directly affects the competitiveness of chemical companies, especially smaller enterprises. With tighter credit conditions, many SMEs may struggle to secure financing, leading to production cuts or even closures.
Reporter: Are there any opportunities for the chemical industry under the "two defenses"?
Yu Changbin: While the "two defenses" bring challenges, they also create opportunities. For instance, a stronger RMB makes imports cheaper, helping companies access foreign technology. Rising agricultural prices could boost domestic demand, and while natural disasters like the southern snowstorms are difficult, they can also stimulate infrastructure and recovery efforts. Overall, the chemical industry faces both challenges and opportunities under this policy.
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