China is making its fight against inflation a top priority this year, even if comes at the expense of economic growth.
Premier Wen Jiabao blamed "imported" pressures, including high oil and commodity prices, for an inflation rate now stuck at 4.9 per cent, and significantly above the government's target of 4 per cent for this year, he said.
"Inflation is like a tiger. Once you let it out, it's very hard to cage again," Mr. Wen said in a news conference Monday after the closing of the National People's Congress, where delegates ratified a five-year plan that forms the basis for all economic and social planning policies.
China's relentless growth is adding pressure for officials coping with a host of economic challenges. Inflation is heating up, runaway real estate prices have many worried about an unsustainable bubble, and there's increasing discontent about the growing gap between rich and poor.
In its effort to tame inflation, the People's Bank raised interest rates three times between mid-October and mid-February, and analysts see more increases coming. Government has imposed price controls on some basic goods. Officials are also encouraging strict regulations limiting the number of property purchases per buyer, and granting the right to purchase only to those with appropriate residency permits or tax receipts, for fear speculators are driving the property market into a frenzy that's bound to crash.
Reserve requirements for banks have also seen a sharp increase in an effort to remove excess liquidity left over from the government's economic stimulus plan.
But so far, those measures have had little noticeable impact. Inflation in February stood at 4.9 per cent year-over-year, the same as the previous month. Economists say they expect further rate hikes this year, as much as 50 basis points. (A basis point is 1/100th of a percentage point.) The one-year lending rate is now 6.06 per cent and the one-year deposit rate is 3 per cent, notably below inflation.
Chinese officials are "on the right path," said Brian Jackson, a senior emerging-markets strategist with Royal Bank of Canada in Hong Kong. "Obviously the wild card is oil prices. If they keep on increasing, there is a risk inflation will stay higher for longer. There is no room for complacency on this."
At stake may well be the financial health of much of the world, owing to China's massive demand for imports. A significant slowdown in growth in China would lead to a correction in commodity prices and a drop in foreign investment, pushing many economies - including Canada's, according to one analysis - back into recession.
China's GDP growth target is 8 per cent this year, with an overall 7-per-cent target for the next five years. In the previous five years, from 2006 to 2011, China averaged 11.2-per-cent GDP growth.
"Growth of 7 per cent doesn't count as slow," Mr. Wen said. "We must fully exploit this opportunity to adjust the economy's structure and address the long-standing problems in China's economy of a lack of balance, poor co-ordination and unsustainability, so that economic development is adapted to our population, environment and resources."
Special to The Globe and Mail