I spent 2 weeks in Shanghai recently, and I was able to get a feel for the mood in China on the ground. I had countless meetings and also dialed up a lot of contacts living in China outside of Shanghai. Below are some of my observations and interpretations of what I saw/heard.

Germany's Environment Minister Norbert Roettgen announced that the German government has proposed a 15% cut in solar feed-in tariffs, or subsidies given to solar power providers, effective in April for roof installations and July for open field sites, Dow Jones and others reported on January 20. The cut is smaller than the 16-17% decrease rumored last week, and would come in addition to a 9-11% decline, effective in January, that was originally set out in Germany's Renewable Energy Act.

If enacted, the new policy is likely to have a material impact on the Chinese solar industry, including Yingli Green Energy (NYSE:YGE), Suntech Power Holdings (NYSE:STP) and Trina Solar (NYSE:TSL), which have some of the most significant exposure among first-tier Chinese solar product makers to the German market. Germany also represents about half of Canadian Solar's (Nasdaq:CSIQ) 2010 shipments, expected to come in between 600-700MW, according to a Chinese-language interview with the company chairman on January 20.

But will the impact be as negative as it is at first glance? The goal of the policy is to reduce the long-term cost of solar power, and it offers some opportunities both in the immediate future and the longer term. Companies that have available capacity may benefit in Q1 as customers rush installations before FIT reductions take effect, and the policy may allow some Chinese manufacturers, whose vertically integrated business models and favorable cost structures allow them to withstand greater pricing pressure from downstream customers, to capture market share from their higher cost Western counterparts.

For a more detailed breakdown of the impact of FITs on a first-tier cost leader Yingli Green Energy and other Chinese manufacturers, Pacific Epoch clients can refer to our January 19 Yingli Q4 09 and 2010 Preview and other forthcoming solar industry reports.

Ana Swanson edits news and analysis for the Daily Angle and other products.

Baidu's (Nasdaq:BIDU) interactive Q&A channel "Baidu Knows" launched a file sharing platform, "Baidu Wendang," on November 12 at wendang.baidu.com. The platform allows registered users to upload, manage and share documents, for which they earn "Baidu Knows" points, and download documents using the points earned. Non-registered users can search and view file content.

Some of our editors and analysts wondered: the service was named "Baidu Docs," it sounded like "Google Docs" -- could it replace Google (Nasdaq:GOOG) Documents in the mainland? For the past few months, Google's document-sharing service has become nearly unusable in Shanghai, opening every other day at best, crashing multiple times a day, and in general causing frustration and teeth gnashing. (For unknown reasons, Google searches and Google News also tend to be spotty, while Google Calendar is fairly reliable.) China residents have grown used to Internet disappointment -- Facebook, Twitter and many foreign blogs been inaccessible in China since the fall -- but we could definitely use a Google Docs look-alike.

Despite our hopes that Baidu might spare our patience and teeth, however, its service is not a localized duplicate of Google Documents. Uploaded content is accessible to all Internet users, not just personal contacts, and the service lacks a function to edit shared documents, a major draw to Google.

The new service is actually more similar to a user-generated version of the Google digital library project, with more scattered content: how-to books for Linux learners, pirated PDFs of the "Twilight" series (not that I was looking) and cheat sheets for college exams.

With the domestic outcry over Google's digital library, it seems like an odd time for Baidu to launch an overlapping service. Google is now locked in a court battle with authors and publishers over a settlement for works reproduced in its digital library project, and the controversy has also turned up the heat on Google within China. State broadcaster CCTV aired multiple reports last month that the Google library is suspected of large-scale copyright infringement of Chinese-language books, and the China Written Works Copyright Society, which is heading up the domestic complaint against the Google service, recently called on the Chinese government to lend a hand in swaying U.S. authorities.

Will Baidu also face copyright trouble over its service? While Baidu has not always been the darling of CCTV and other media outlets, it may escape the intense criticism that recently plagued Google China; however, it's doubtful that it can ward off all trouble. Baidu Docs carries a notice that it deletes all disputed content and holds registered users responsible for copyright violations, but China's online video sites carry similar warnings and have still been subject to a flurry of lawsuits. And unlike Baidu's mp3 service, Baidu Docs stores pirated material on Baidu's own server.

Despite the legal risks, Baidu's service is growing quickly. We think it could be a hit, registering more Chinese users, who tend to like online reading more than their Western counterparts, and improving stickiness for existing Baidu users. The service had amassed 7,400 documents within 48 hours of its November 12 release, and the number had doubled to 15,242 by Monday morning. As of Monday, professional reference made up the greatest proportion at 5,578 files, while tests, essays and other student educational materials represented 4,603 files, and literary works accounted for 2,516 documents.

Baidu Docs could see even sharper growth if the company begins promoting it through its search results, as Baidu has done for products like Q&A service Baidu Knows, wiki site Baidu Encyclopedia and C2C e-commerce platform Youa.com. We'll keep an eye out for further growth and legal complications for Baidu Docs and keep clicking hopefully on Google Documents in the meantime.

Ana Swanson edits news and analysis for the Daily Angle and other products.

Last month I blogged about the joint venture announced between ECOtality (OTC:ETLY) and Shenzhen Goch Investment Ltd. to develop charging stations for electric cars. At the time, the deal hinted at a big chance for the company to enter the Chinese market. This week, however, a huge opportunity emerged on the other side of the Pacific when the US government announced the company will get nearly $100 million in federal stimulus funds to install 13,000 charging stations across America. In a August 6 report by WDEF News the funding was described by company president, Jonathan Reed, as “by far the biggest electric vehicle initiative in the history of the world."

The funding marks the next stage in the development of a company which only recently marked its ten-year anniversary after being founded in 1999 as a hydrogen fuel cell developer. The company has ambitions in China, where they hope to supply electrical charging infrastructure to support government plans to provide electrically-powered transport for the Shanghai World Expo in 2010.

If it can successfully deliver the charging stations in America it will be a key testing ground for its China plans. From the looks of it, plans to install stations in the US are developing fast as the aforementioned WDEF News report said that ‘work begins in two-weeks to start mapping out the most feasible locations for public charging stations’. Given that electric charging stations are relatively untried on a mass scale, by testing how these stations work and how best to place them to service drivers needs, the new initiative will provide an important learning experience for the company which can help it achieve its China ambitions. Given the speed that governments on both sides of the Pacific are moving at to support electrically powered transport, you can soon expect ECOtality to use experience gained in the US to make its presence known in China.

China’s GDP figures have perplexed commentators for years, particularly in light of their strange relationship with energy consumption. In late 2008, some analysts pointed to a huge drop in energy consumption as a clear sign that GDP growth had hit a wall and hailed it as a proxy indicator more reliable than government announcements which at the time trumpeted lower, but not insubstantial, growth.

To address some of the derision surrounding GDP calculations, China’s National Bureau of Statistics issued a report on August 3 attempting to explain the paradox. According to them, energy use figures have contradicted GDP stats because of three key factors: the economy has shifted away from energy-intensive industry, citizens are using energy more efficiently and because there is no direct relationship between GDP growth and energy use.

The explanation throws some much-needed light on a very contentious issue and suggests that some very real changes have emerged in China’s economy in recent years. How far this will go to silence the armies of naysayers who regularly deride China’s statistical releases remains to be seen; the reasoning, after all, comes from a state-run body which conveniently affirms that the Chinese government’s policy goals of building a more efficient and less-energy intensive economy are being met.

However, the claims seem to stand up to independent scrutiny as Tao Wang, economist at UBS, has backed them up with her own research. Perhaps this is one debate about China’s GDP figures that can now be laid to rest.

Cosmetics retailer Sephora has proven to be a sunny spot for LVMH Moët Hennessy Louis Vuitton (EPA:MC, OTC:LVMUY), its parent company and the world’s largest luxury products group, and a huge roadblock for competitor Sa Sa International Holdings Limited (0178.HK).

Despite the fact that LVMH saw profits drop 23% in the first half of 2009, mainly on lower watch and jewelry sales, “Sephora registered revenue growth in all of its markets … and an increase in its profit from recurring operations.” Meanwhile, Sa Sa dragged its mainland-market bottom line from a RMB 17 million loss in 2005 to a RMB 27 million loss in 2008.

For the following reasons, I expect Sephora China to continue its strong mainland performance, while I suggest Sa Sa start shadowing Sephora.

Since first coming to Shanghai in 2005, Sephora now has about 40 stores in 19 cities, including one in Hong Kong. Sa Sa entered the mainland in the same year and now has 33 locations, including stores and counters, and intends to expand to 54 locations in fiscal 2009. Sephora’s network is not only larger, but is located in high-profile, high-traffic locations, mainly on the first floor of urban shopping malls. Meanwhile, Sa Sa’s poor locations and inferior design concepts make it look like an ordinary mom-and-pop store and raise doubts about product quality and authenticity.

Sephora supplants impatient and judgmental sales girls – in some stores it’s advisable to dress up before going in – with open shopping space and testable products. In the same way, the company keeps its customers informed about promotions via emails and text messages but at a moderate, i.e., not annoying, rate. Furthermore, their giveaways tend to be things consumers actually want. For example, two to three times a year the company will hold sales events that let consumers use points, which are earned for making purchases in the store, as cash towards the purchase of any product.

Sephora started out by focusing on the brands trusted by Chinese consumers. While these well-known brands may mean thinner profits, they give Sephora credibility and, thus, the ability to introduce new products with higher commission rates.

In contrast, when consumers go to Sa Sa stores, they find themselves surrounded by strange brands. This generic branding has fueled Hong-Kong success by offering low-priced products, but, because recognition of the Sa Sa brand is lacking in the mainland, customers are unwilling to buy. As I mentioned earlier, location and décor do little to ease consumer uneasiness.

In a more macro perspective, I see cosmetics as a necessity for most Chinese woman, and, therefore, a relatively inelastic good. In my June retail report, I already noted that cosmetics sales have outpaced that of sportswear and fashion this year, even in first-tier cities where consumers are more affected by the financial crisis. Accordingly, I won’t be too surprised if, as LVMH suggested in its earnings report, Sephora garners an even larger share of the China market going forward.

China Daily ran a story today detailing plans to link Chongqing to Rotterdam via an inter-continental rail line by 2012. Although not alluded to in the article, the link has been in development for some time on both the European and Chinese sides and, when completed, has the potential to connect China not only with Europe but also Central Asian and the Middle Eastern states, all of which had developed into prosperous export markets prior to the recent trade slowdown.

In 1993, the European Union launched the Transport Corridor Europe Caucasus Asia (TRACECA) program in a bid to link Europe to Central Asian republics (Kazakhstan, Kyrgyzstan, Uzbekistan, Tajikistan and Turkmenistan) and three Caucasian republics (Georgia, Azerbaijan and Armenia). Between 1993 and 2005, approximately EUR 1 billion has been spent on project infrastructure including ports, railways and roads.

China’s huge investment in rail transport, particularly in Xinjiang, will dovetail with European plans. Last year, the government spent RMB 330 billion ($48 billion) on railway investment, and has plans to nearly double that figure in 2009 by spending RMB 600 billion ($88billion). Of that total, $17.6 billion will be spent on railway development in Xinjiang alone and will complement recent projects, funded by the World Bank and Asian Development Bank, aimed at improving transport networks in the region.

For many years, the inhospitable terrain separating China from Central Asia has limited China’s ability to channel trade westward, but the development of a rail link has the potential to shift the axis of China’s external trade away from Eastern ports. Eastern harbor cities have provided the trading platform that has underpinned China’s recent development, but, according to a 2006 paper by Professor John Garver of the Georgia Institute of Technology, the inability to channel trade westward has hampered China’s ability to recreate development experienced by the United States in the second half of the 19th century. This historical parallel has not been lost on the Chinese government, which has channeled recent spending into making Urumqi , the capital of Xinjiang, a logistics hub to handle increased trade flows and a key stop on the Chongqing – Rotterdam rail route.

Though it has been under development for some time and a rail link to Europe is planned for 2012, the plan still has a long way to go to be able to handle trading volume even similar to some of the smaller East coast ports. Challenges abound including: how to develop the rail lines and communication networks to root the project as well as how to establish co-operation between the many states through which the line intends to run. However, it seems that political will to build the link does exist; the Shanghai Cooperation Organization including China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan has been hatching joint plans around these ideas since its founding in 2001. With efforts on the European side also, the link will become more prominent in the coming years and should open up a new frontier for Chinese exporters.

Lately, I have been connecting the dots between elderly people and 3G. On the bus, one older woman described 3G applications, such as going on the internet and watching TV, to her girlfriend.

"I’m not familiar with the internet, but I would like to watch Beijing opera (jingju) on a mobile phone,” the friend replied.

A week later, I noticed more than a few middle-aged and older males holding up their “shanzhaiji” (generic, name-brand-imitation phones) to watch the news on the subway. The more I went out the more I noticed these men cranking up the volume to watch the news on the subway, on their way to work and even walking the dog. I couldn’t help but think of the way my grandpa used to hold the radio up to his ear to find out what was happening outside.

The thing is, I think these mobile-TV men are interested in more than just mindlessly passing the time. In their loud and continual watching, it seems as though they are trying to express their worldliness, trying to show they are conversant in current affairs.

These opera enthusiasts and fact buffs are strong in number, and, if prices aren’t too high, they could buy their own mobile terminal or, better yet, have their children give them one as a gift. After all, a lot of these mobile users have been making calls on their children’s obsolete cell phones for years; that is, of course, if they even had a phone to begin with.

SARFT’s mobile TV standard, CMMB, is having a hard time expanding its user base, and TD-SCDMA, the homegrown 3G network currently operated by China Mobile (NYSE:CHL, 941.HK), has only grabbed 1 million users after a year of promotions.

If Chinese telecom operators start shifting their ad campaigns from businessmen and hipsters to happy families and filial love, they might just be able to tap into a group of accidental 3G users during next year's Spring Festival.

Li Jing analyzes telecom, e-commerce and search industries in China.

Earlier this month, State Grid Corporation of China (SGCC) announced that R&D of smart grid technology will start in 2010 and related infrastructure construction will be complete in 2020, with more than RMB 200 billion to be invested each year. SGCC said clean energy will be a crucial part of its smart grid plan and aims to increase the portion of electricity generated by alternative sources. The company estimates that 16% of total installed capacity will be contributed by wind, solar and nuclear power by 2020.

Smart grid is not only good news to households and environmentalists, it is also stirring up investors. Stocks of companies with a foothold in the field – including manufacturers of related equipment such as smart meters, advanced sensors and transformer substations – soared when SGCC released its big plan. Both domestic companies, such as Nari Technology Co. (600406.SH) and Henan Pinggao Electric Co. (600312.SH), and foreign players, like ABB (NYSE:ABB) and GE (NYSE:GE), are eyeing the lucrative market. Smart grid is also driving the need for electricity storage technology, and several companies in the field, including Net Power Technology, have received large investments. Massive construction endeavors also bode well for upstream materials including iron, steel and concrete. The smart-grid food chain is so extensive that various opportunities should be unveiled to careful investors in the near future.

Even search companies are among those working towards the smart-grid future. In February this year, Google (Nasdaq:GOOG) unveiled PowerMeter – an online application that can be interfaced with smart meters and thermostats to allow users to monitor home electricity consumption. Not surprisingly, Microsoft (Nasdaq:MSFT) followed suit with its own energy information management tool, Hohm, last month.

Current grid systems are unreliable, wasteful and overly coal-reliant. Smart grids attempt to change the way electricity is generated, distributed, stored and consumed in an effort to make energy consumption more visible and manageable for both utilities and consumers.

Smart grids may promise a smaller carbon footprint but truly offer a bigger case for investors.

China changes fast. People often quote some article that was written in the New York Times a few years back claiming that a year in China is equivalent to 4 years in the US. I haven't seen this article, but the pace of development here seems to lend some credibility to the argument, even if it's merely anecdotal.

The rapid rate of change is especially challenging to forecast and adjust to for the retail sector. Not only are the physical questions challenging, such as new store locations and product expansion plans, but also attempts to adapt to changes in consumer attitudes and brand preferences have proven difficult.

To further complicate things, this morning at a breakfast hosted by the Economist Intelligence Unit, PT Black, a partner at Jigsaw International, spoke about how we are also witnessing a fundamental shift in how Chinese consumers view themselves. Historically, a global brand would attempt to localize on at the country level, but future success in China will come from taking this another step and having a regionally specific campaign.

PT went on to make the point that one of the most recent changes consumer behavior is the increase in regional confidence. People have pride in the region in which they live, frequently respond to their local celebrities more than the national pop-stars, and are starting to have fun laughing at themselves and the idiosyncrasies of their home region. This is not an argument for regionalism over nationalism, but just an observation that major brands need to consider regional marketing campaigns in their national strategies.

Much has been written about the enormous potential of China’s e-commerce sector; however, until I switched banks, my own online shopping experiences had proved rather less positive.

While all of China's major banks issue China Unionpay debit cards – Unionpay, in which TelecCommunication Systems Inc. (Nasdaq:TSS) holds a 34% equity stake, is the country’s largest payment provider – and all online retailers accept Unionpay as a payment method, they do not accept Unionpay cards issued by all banks.

I previously had a Bank of China (3988.HK, 601988.SH) Unionpay card and, seeing as how BoC is the nation’s flagship international bank with more than 13,000 branches across China and dozens more overseas, assumed it would be golden for buying things online. Turns out, each website has its own list of supported banks, and Bank of China is missing from a lot of lists.

Most Chinese friends and colleagues tell me that they sign up for multiple bank accounts with different banks to increase the likelihood of their card being accepted by online retailers, but that kind of undermines the whole point of online retail being quick, easy and convenient.

In fact, China’s online payment landscape is less-than-straightforward. One of the most popular alternatives to buying online with debit or credit cards involves couriers dispatched to collect your cash, but this means waiting for hours for the delivery guy to arrive, and then spending 30 minutes directing him to your home or office when he inevitably takes the wrong turn.

Mobile phone payments via text message are another alternative, but carriers levy a significant handling fee on these kinds of transactions and this payment form is only suitable for small amounts.

There are third-party online payment services, such as Alibaba’s Alipay, which overtook PayPal in terms of users last week, but again my lack of supported credit or debit card would have required me to queue up at the bank to make a transfer. Some online payment services sell top-up cards at newsstands and small stores, but, when they are sold in denominations of RMB 100, I would need about 40 top-up cards to buy one plane ticket home.

So, when I was faced with the need to open a new bank account, I canvassed opinion as to which bank was the best for online transaction purposes and was given the same answer by almost everyone: China Merchants Bank (3968.HK, 600036.SH).

Taken by the consensus, I used my shiny CMB Unionpay debit card to make my first proper online purchase in China, my ticket home, and am happy to report that it was quick, easy and seemingly secure.

I entered my card number and mobile phone number on the website and 30 seconds later received an automated call asking me to enter my pin. Less than a minute later, I received a second text message, and an email, telling me that my payment had been successfully processed and that the transaction was complete. I then got a follow-up text message from my bank informing me of the transaction, with a number to call in case it turned out to be fraudulent.

Having finally been granted access to China’s online retail club, I am slowly starting to believe the hype. Online shopping in China is indeed convenient and very much a growth industry – provided you’re with the right bank.

Chinese sports brand enterprise Li Ning (2331.HK) tapped into the badminton market when it announced this week that it had wholly acquired Kason Sports (Hong Kong) for RMB 165 million. According to Li Ning's five-year plan ending 2013, the company hopes to shrink the ratio of "Li Ning" brand revenue from 95% of total revenues to less than 80%. While this acquisition may help realize this long-term goal, it's not expected to have much material impact in the short term.

The popularity of badminton in China – a survey by the General Administration of Sports suggests that badminton is the second ranking sport in terms of participation in China – could mean good things for Li Ning and its new subsidiary, but problems with competition and integration loom. Although Li Ning has the benefit of taking up badminton before its main competitors, company data places Kason third in China's badminton market in 2008 with about 12% of the market, compared with 20% for Japan's Yonex and 14% for Taiwan's Victor.

Finding it difficult to compete with popular Nike (NYSE:NKE) and Adidas brands and cheaper 361 and Anta products, Li Ning is right in trying to explore new markets. However, whether it can manage the new brand smoothly remains to be seen.

Li Ning gave up on the Kappa brand in 2005, two years before its five-year distribution license ended. Kappa brought the company 2004 revenue of RMB 100 million, before being taken over by China Dongxiang and booking China revenues of RMB 2.8 billion in 2008.

The current success of Kappa in China indicates a problem with Li Ning brand management, and I hope Li Ning has learned enough from its experience to avoid making Kason another Kappa.

In February, I highlighted concerns that a lack of charging stations may stymie development of China’s fledgling electric car market. However, the recent announcement of a joint venture between Ecotality (OTC:ETLY) and Shenzhen Goch Investment Ltd. to develop charging stations suggests that electric cars will not be plugless for long.

The deal, worth $15 million, will result in the development of manufacturing capacity for charging stations and will provide Ecotality, which has been developing electric vehicle charging for more than a decade, with a spring board into a car market estimated by Pike Research to grow from nothing now to approximately $1 billion by 2015.

This deal shows that while the car industry may come to be dominated by state-owned behemoths, there is still potential for money to be made in spin-off industries.

This Seeking Alpha article on NetEase (Nasdaq:NTES) by Zhang Xiaofan – a blogger with whom I’m not familiar – brings up the useful point that NTES’s share price tracked closely with the PCU of its blockbuster game Fantasy Westward Journey (FWWJ), until NTES won the rights to World of Warcraft (WoW) in mid-April, sending NTES to its current heights.

Conversations I’ve had with Guo Cheng Gang, our games analyst, add a little more nuance to this discussion.

As Zhang points out, FWWJ has seen its PCU bounce back from lulls at several points in the last few years. This is important, ostensibly, because even though WoW sent NTES’s share price up, FWWJ’s sustained high performance will likely keep it aloft as the company struggles with administrative and technical issues impeding the WoW launch (more on this later).

Yet FWWJ’s recent announcement of a 2.29 million PCU on July 5 might not necessarily be another comeback kid moment. Guo recently told me that, based on interviews and monitoring of the game, the increased activity may be attributable to an influx of gamers protesting the delay of the relaunch of WoW. Specifically, WoWers are entering the game not to journey westward fantastically, but rather to use the platform to criticize NTES in the chat sections and in open conversations.

What does this mean for NTES? For one thing, it clearly suggests that FWWJ’s numbers are not necessarily a cause for relief. In addition, Guo thinks NTES may be dropping the ball on refreshing FWWJ content. As the game ages – it's been around since 2004 – NTES must renew the appeal by putting out expansion packs and running promotions at fairly frequent intervals. If the lack of promotions during several recent holidays is anything to go by, promotions are something that NTES may have started neglecting. Of course, this is probably because the company is busy inflating its much-celebrated life raft, WoW.

Which brings us to another issue. Again, I'm merely rehashing arguments made by Guo here, but, despite the resounding investor confidence suggested by a 140% stock price increase spurred by NTES's nabbing of WoW rights, WoW is hardly the cash cow that FWWJ has been. Most obviously because Blizzard, which is owned by Activision Blizzard (Nasdaq:ATVI), has rights to around 30% of WoW operating revenue, leaving NTES with a margin of around 45%, compared with FWWJ's 50-60%. NTES recently tried to douse rumors that it would pay more to Blizzard than would WoW's former custodian, The9 (Nasdaq:NCTY), saying that it would pay no more than $60 million as a base fee. Guo has said, however, that many industry rumors cast doubt on the accuracy of this assertion. In addition, NTES's recent 20-F implies that it is obligated to pay a "technical support fee" to StormNet, a new JV between NTES and Blizzard.

That said, WoW has a huge incipient Chinese user base, and even if it is less profitable than FWWJ, it looks to be a reliable long-term revenue source. NTES will most likely get WoW servers up in August, meaning that it is likely to miss the summer boom period for online gaming. Chinese MMORPGers are fickle beasts, and already many of them flocking to alternatives, including Kingsoft's (3888.HK) JX Online 3, Perfect World's (Nasdaq:PWRD) Zhu Xian and Shanda's (Nasdaq:SNDA) AION, according to our polls. NTES should be worried about more attrition – and possibly a drop in its FWWJ numbers – as the protesting WoWers stop lobbying in FWWJ and start playing other games.

Over the past few weeks, speculation has been mounting that China is planning to issue a new RMB 500 bank note in November . Reports suggest that the new note, which would be far and away the largest face-value bank note in circulation on the mainland (the current largest note is the red RMB 100-bill), will feature the portrait of Deng Xiaoping.

China’s central bank, the People’s Bank of China (PBoC) has been busily denying these plans in the mainstream media over the past few weeks. But regardless of whether or not it is true, it seems to me that even the rumor itself is adding fuel to the fire, and is part of a growing public panic about the threat of inflation.

The possible printing of a RMB 500 bill will have a much larger psychological impact in terms of pushing up inflationary expectations than gasoline and diesel price hikes earlier this week. It’s therefore not surprising that PBoC officials are attempting to downplay the rumors, as, even if the issuing of a RMB 500 note is something that has been discussed internally in the past, it is clear that now is not a good time to be announcing such news.

No one seems to know where the rumor originated from (the police are apparently on the case). Even this fact can be viewed as evidence of the rising tide of anxiety about inflation that is sweeping the nation – people are calling inflation from every direction. Recently, there have been news reports suggesting that, in some first-tier cities, people have been rushing to buy properties, driven by the possibility of looming inflation.

The big banknote therefore mirrors a big problem. On the one hand, asset prices have been rising significantly since the beginning of the year, along with the rebound of the economy. On the other hand, these recoveries have been spurred by government fiscal stimulation and loose monetary policies, and the sustainability of the recent growth remains questionable.

As Vice-Premier Li Keqiang said at the Global Think Tank Summit in Beijing on July 2nd, the recovery’s foundations are far from solid. Rising inflation expectations could make it more difficult for the Chinese authorities to maintain its broadly supportive monetary stance, which is still needed to sustain the recovery.