Wen Jiabao Is Still Serious About Inflation

With somewhat slower economic growth and increasingly clouded outlook in the global economy, I have been wondering what Chinese policy makers would really like to do amid stubbornly high inflation.  Today, we have Brazil cutting rates, which baffled some analysts out there, but perhaps tells you that some emerging economies are actually worried about growth.

I am not too sure if anyone has been hoping that the Chinese policy makers would start easing.  Certainly, I have repeatedly pointed out that there is no reason why they should ease policy, although there might be a certain probability that they give up on inflation front.  As Victor Shih and Carl Walter pointed out, China may actually be rather more happy about inflating the problems away, and credit crunch is more of a concern for the “ruling class” (if you like) rather than inflation.

Now Wen Jiabao came out and said that inflation-fighting remains their top priority, and the government will continue to curb property prices.  AFP quotes Wen Jiabao saying that:

Currently our country’s economic development is still facing a very complicated domestic and external environment that is unstable and fraught with many uncertain elements, [but] stabilising overall price levels remains the priority task of our macroeconomic controls (and) will not change.

I would certainly welcome this if he is going to do what he said he would do, although that would put the economy at risk of hard-landing/recession (whatever you would like to call it), as I have pointed out very early on that it is unavoidable if the Chinese are serious about inflation.

If he really means what the government and central bank will do, I think it would be fair to expect more monetary tightening from the People’s Bank of China down the road.  I do not expect aggressive action, however, as the global macroeconomic slowdown will inevitably hurt the Chinese economy as external demand contracts (and that is already happening, as we have just seen it in the latest PMI figure).  One or two rate hikes and/or reserve requirement increase by the end of this year would be the most probable outcome unless we see some rapid deterioration in the global macro picture, something that I can’t rule out.

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About Zarathustra

Zarathustra: Founder and Managing Editor of Also sprach Analyst. Once an analyst, now an investor and entrepreneur. Based in Hong Kong, but Londoner at heart.