In early 2008, the global economy faced a "cold period," marked by the stock market crash triggered by the U.S. subprime mortgage crisis. The economic chill was intense and widespread, leading some in China to fear that the country’s economy might shrink during the year. There were even rumors that the central government might reconsider its "two defenses" policy—designed to prevent both rapid economic growth from overheating and structural price increases from spiraling into inflation. On February 18, 2008, the National Bureau of Statistics released new data that surprised many, as it seemed both unexpected and predictable at the same time. Among the key statistics released, two stood out: first, the consumer price index (CPI) rose by 7.1% year-on-year in January, the highest level since 1997, partly due to the Spring Festival and snowstorms; second, new loans surged past 800 billion yuan in one month, setting a record for monthly lending. These two "new highs" made the "two defenses" strategy more relevant than ever. But what exactly does "two defenses" mean, and how is it impacting the chemical industry? To explore these questions, we spoke with Yu Changbin, a researcher at the China Enterprise Development Research Center. Reporter: Why is the central government concerned about prices moving from structural growth to full-blown inflation? Yu Changbin: According to the National Bureau of Statistics, the CPI in 2007 rose by 4.8%, an increase of 3.3 percentage points compared to the previous year. In January 2008, the CPI hit 7.1%, the highest since 1997. A clear sign of inflation is a general rise in prices. When inflation exceeds 10%, it's considered serious. Our country experienced two such episodes in 1988 and 1993, which had lasting impacts on price stability. Reporter: What are the possible causes of this inflation? Yu Changbin: Globally, China's inflation rate is much lower than in other developing countries. However, rising global commodity prices have started to affect domestic markets. The oil crisis, the expansion of bioenergy, and surging agricultural prices are all contributing factors. These elements are closely interconnected. Starting with the oil crisis, international crude oil prices hit $100 per barrel in early 2008, a significant milestone. This has pushed up energy costs, affecting production and transportation. At the same time, the development of biofuels like ethanol has increased demand for crops like corn, further straining food supplies. The U.S., for example, has been heavily investing in ethanol, using large amounts of corn for fuel. This has driven up global grain prices, affecting not only the U.S. but also countries around the world. In China, food prices rose by 12.3% in 2007, with meat and eggs seeing even sharper increases. As oil and food prices rise, they become major drivers of inflation in China. Reporter: How can the chemical industry respond to the "two defenses" policy? Yu Changbin: The goal is to prevent the economy from overheating. For the chemical industry, this means controlling investment and avoiding overcapacity. Using tools like interest rates, exchange rates, and tax policies can help manage growth. Chemicals are capital-intensive, so careful regulation is essential. Reporter: What does a "forced landing" policy mean? Yu Changbin: It refers to measures taken by the government to slow down economic growth, such as reducing export subsidies, adjusting tax policies, and tightening monetary supply. These steps aim to curb excessive investment and avoid inflation. Reporter: How will these policies affect the chemical industry? Yu Changbin: Export tax rebates for many chemical products have been reduced or eliminated, especially for high-energy, high-pollution goods. This has already impacted the industry, and the pressure may grow this year. Tight monetary policy could also hurt small and medium enterprises, making it harder for them to get loans and potentially forcing some to shut down. Reporter: Are there any opportunities under the "two defenses"? Yu Changbin: While challenges exist, there are also opportunities. A stronger yuan may hurt exports but help imports. Rising agricultural prices may boost rural incomes and stimulate domestic demand. Natural disasters, while difficult, can also create new business opportunities. So, the chemical industry faces both challenges and chances under the current policy environment.

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