The last five years have been tumultuous for the People’s Republic of China’s economy, reflecting both domestic and international turmoil. The problems did not start with the global financial crisis (triggered by the collapse of Lehman Brothers in the USA in September 2008), but with the high domestic consumer price index (CPI) and house price inflation in 2007 that followed years of double-digit growth and the accumulation of very large external surpluses. China’s current account surplus reached a record high of 10.1% of gross domestic product (GDP) in 2007. On top of that there were substantial ‘hot money’ inflows from abroad, attracted by a property boom in major cities and the expectation of renminbi (RMB) appreciation. To slow the pace of appreciation, the central bank intervened heavily in the foreign exchange market and sterilized excess liquidity in the banking system resulting from external surpluses by raising reserve requirements and/or selling central bank bills. In retrospect the sterilization effort may not have been aggressive enough, as both CPI (especially the food price component) and property price inflation became serious in 2007 (see Figure 6.1). Food, producer and consumer price inflation (monthly, annualized percentage change, January 2006–December 2012) https://s3-euw1-ap-pe-df-pch-content-public-u.s3.eu-west-1.amazonaws.com/9780203108765/4d8d71ff-8299-44a2-9758-90aee8006bc0/content/fig6_1_OB.tif"/> Source: NBS, Bloomberg