"Very difficult" for China to meet inflation target: People’s Daily

Despite a series of fiscal manoeuvres to curb runaway consumer prices, it will be “very difficult” for China to meet its 2011 inflation target, the official People’s Daily said in a strongly worded editorial last week.

“The fundamentals that drive consumer prices haven’t been eradicated and economic growth still faces many uncertainties,” the article said. “The top priority in the second half is to stabilise the prices.”

Fiscal policies need to be “steadfast” and “flexible” to maintain economic growth without stoking inflation, it added, underlining the challenges facing the country’s policymakers.

While Western analysts pay attention to the economic data, Chinese investors tend to listen to the tone of rhetoric emanating from Beijing, particularly editorials from official state media, which often serve as an indicator of government concerns.

Beijing is addicted to setting targets and making plans, from how much banks should lend each year to how many children each married couple should have. However, setting targets is not the same as hitting them.

China’s government has increased its tolerance for inflation to sustain hard-won growth. The National Development and Reform Commission, China’s top planner, has lifted its consumer price inflation (CPI) target for 2011 to 4% after the country failed to meet the 3% target last year.

China’s consumer price index rose to 6.5% in July, driven mostly by food prices, which jumped 14.8% from a year earlier. The index increased to 5.5% for the first seven months this year. Even though the central government has raised interest rates five times and lifted the amount banks must hold in reserve nine times since last October.

Although economists reckon inflation peaked last month and will moderate towards the end of the year, pork prices, which account for around 30% of CPI, show no sign of slowing. Hog prices in August might climb by 50% from a year earlier, Chinese media reported, and industry analysts say prices are unlikely to decline significantly in the short term.

“The current pork supply is tight, although pig farmers have started topping up their stocks, but breeding and raising pigs for meat usually takes around a year-and-a-half,” Chenjun Pan, an analyst at RaboBank, told FinanceAsia in an interview.

Statistics show that China’s economy generated more than Rmb20.4 trillion ($3 trillion) during the first half of this year, up by 9.6% year-on-year. The investment in real estate development jumped 32.9% to Rmb2.65 trillion, while investment in fixed assets grew 25.6% to Rmb12 trillion.

“There is still much upward pressure on inflation expectations in the second half. Inflation pressure is mounting in categories including food, raw materials and labour cost. The imported inflation will continue to hit domestic consumer prices,” the article said.