China to raise inflation target in dovish signal

BEIJING - China will set a 4 percent target for consumer inflation next year, up from this year¡¯s 3 percent objective, state television said on Tuesday, an indication that the government will desist from aggressive tightening even as price pressures mount.

By (Reuters)

Published: Tue 14 Dec 2010, 6:17 PM

Last updated: Mon 6 Apr 2015, 10:07 AM

The slightly higher threshold for inflation was consistent with another report in official media earlier in the day that China will aim to cap new loans at about 7.5 trillion yuan ($1.1 trillion) next year, a more generous ceiling than many in the market had been expecting.

“The main targets for economic and social development set by the central government for next year are that GDP will grow by about 8 percent and the consumer price index will be capped at about 4 percent,” CCTV quoted Zhang Ping, head of the powerful National Development and Reform Commission, as saying.

The 8 percent growth target is, as in past years, likely to be a moot point. Most economists think the world’s second-largest economy will grow about 9 percent next year.

And although the 4 percent consumer price target is higher than this year’s, it is not new ground for China. In 2008 Beijing targeted an average of about 4.8 percent inflation and it aimed for about 4 percent in 2009.

The comments by the NDRC’s Zhang were the first official statement of numerical targets for 2011 following the Central Economic Work Conference, an annual leaders’ meeting that ended on Sunday and is key for setting policy for the coming year.

Chinese leaders put more emphasis on the fight against inflation in their statement after the conference, but also vowed to strike a balance between ensuring price stability and maintaining growth.

A 7.5 trillion yuan target for new loans next year, the same as its target this year, would be one way for the government to make clear it is not willing to sacrifice growth.

Control of credit issuance is one of the most important monetary policy tools in China and many in the market had assumed that Beijing would lower the new lending objective next year as a way of tamping down on inflationary pressures.

But a report on the front page of the China Securities Journal, citing an unnamed source described as authoritative, suggested otherwise.

“The Chinese economy is very big now and a target of 7.5 trillion yuan in new loans will not trigger all-round inflation,” the newspaper quoted the source as saying.

A Reuters poll of 26 economists forecast on Monday that Beijing would aim to reduce the new lending target to 7 trillion yuan next year. ¨ûID:nL3E6ND0QB¨ü


Most also forecast that the central bank would raise rates before the end of 2010 and twice again in 2011 as part of a campaign to control inflation, which quickened in November to a 28-month high of 5.1 percent.

The newspaper also said the government would likely aim for growth in the wider M2 measure of money supply of 16 percent in 2011, which would mark a slowdown from this year’s pace of roughly 20 percent.

“The two targets are consistent with one another and the logic is right, although we still need to wait for the official announcement,” said Hu Yuexiao, economist with Shanghai Securities.

China will also use regulatory tools to restrict lending next year, including ordering banks to raise their capital adequacy ratios and to set aside more provisions for bad loans, he said.

China’s growth has been a bright spot in an otherwise sluggish world economy following the global financial crisis. But inflationary pressures have also picked up, prompting the central bank to increase bank reserve ratios several times this year and raise interest rates once.


In its report, the China Securities Journal said the country’s policy focus would change over the course of the year, with the battle against inflation likely to top the agenda in the first half but supporting growth to remain the overriding objective.

“China’s inflation will probably be higher in the first half of next year and then ease in the second half. It may peak in the second quarter. So policies in the next three to six months will mainly to curb inflation,” it said.

“But inflation next year will not be as high as expected. So monetary policy will favour quantitative measures. China will be very cautious in raising interest rates. It will only raise interest rates when inflation deteriorates,” it added.

Hu at Shanghai Securities agreed with the inflation outlook, but added that the new loan target of 7.5 trillion yuan would add to price pressures, making it a must for the central bank to raise interest rates.

($1=6.665 Yuan)

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