China Stresses Stability Amid Further Growth

Combating Inflation the Government’s Top Priority


BEIJING—China Premier Wen Jiabao pledged Saturday to make combating inflation the government’s top priority this year, but signaled an intention to realize the goal without sacrificing the relatively fast economic growth and strong job creation that is critical to maintaining social stability.

In a two-hour-long speech that kicked off the country’s annual legislative meetings, Mr. Wen also disclosed key points of China’s 12th Five-Year Plan, a socialist-style blueprint of economic and social development, reiterating Beijing’s long-held promise to push ahead with structural reforms and make the world’s second-largest economy driven more by domestic consumption than exports and government-led investment.

In his annual work report at the opening ceremony of the National People’s Congress, China’s legislature, Mr. Wen said maintaining price stability is at the top of the government’s economic policy agenda this year, a signal that Beijing remains on full alert to growing public resentment over soaring food costs and stubbornly high property prices.

“Recently, prices have risen fairly quickly and inflation expectations have increased. This problem concerns the people’s well-being, bears on overall interests and affects social stability,” he said.

“We must therefore make it our top priority in macroeconomic control to keep overall price levels stable,” Mr. Wen said.

Mr. Wen said the government aims to contain consumer price inflation within 4%. The consumer price index rose 3.3% in 2010, higher than the 3% target set in Mr. Wen’s report last year.

However, Mr. Wen said China still aims to deliver economic growth of around 8% this year, maintaining for the seventh year in a row a largely symbolic growth target that the country has consistently exceeded.

The targeted growth rate for this year is higher than the 7% average annual growth target set for the next five years, a sign Beijing intends to engineer its fight against inflation and long-term economic restructuring in a gradual fashion while economic growth and job creation remain the senior leadership’s top priorities.

China’s economy grew 10.3% last year, and economists widely expect growth of least 9% this year.

“Wen’s remarks suggest the government has a more balanced view about curbing inflation and maintaining high economic growth, so the possibility of a further tightening of monetary policy is lower,” said Wang Qing, an economist at Morgan Stanley.

In a bid to rein in rising prices, China has raised benchmark interest rates three times since October and banks’ reserve requirement ratio eight times since the beginning of last year.

Elaborating on the fight against rising prices, Mr. Wen said China should take advantage of the country’s ample supply of manufactured goods and grain reserves, as well as its massive foreign-exchange reserves, to curb imported and structural inflation.

Mr. Wen has set a 16% growth target for M2, the broadest measure of money supply in China, for 2011.

The government will “effectively manage market liquidity and control the monetary conditions for commodity prices rising too rapidly,” Mr. Wen said. Apart from further boosting the supply of farm products and daily necessities, the government will also strengthen oversight of prices and market order via administrative means, Mr. Wen added.

Mr. Wen also reiterated familiar rhetoric on the Chinese authorities’ long-standing pledge to further improve the yuan exchange rate and arrest overly fast rises in the country’s real estate prices.

Offering a glimpse of the new five-year plan, Mr. Wen said the government’s official target for average gross domestic product growth between 2011 and 2015 is 7%, down from a target of 7.5% in the past half-decade. While official targets routinely underestimate growth, the move is nonetheless an important signal that government priorities in the world’s No. 2 economy are shifting to reducing dependence on exports and capital-intensive industries in favor of creating conditions for more domestic demand.

The previous five-year plan, announced in 2006, had a growth target of 7.5%, but the economy grew 11.1% between 2006 and 2010.

Based on last year’s price levels, China’s GDP should exceed 55 trillion yuan ($8.4 trillion) in 2015, Wen said. He added China aims to make the share of research and development spending in GDP total 2.2% in 2015, with the service industry’s value-added share rising by four percentage points.

Also as part of the new five-year plan, China will steadily push ahead with interest-rate liberalization and further expand the use of the yuan in cross-border trade and investment, Mr. Wen said. Beijing will also strive to gradually achieve capital account convertibility, he added.

He also said China will widen the scope for the use of its massive foreign-exchange reserves and increase returns on its foforeign exchangerex reserve investments.

From the Wall Street Journal; March 5, 2011

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