China Inflation Goal Allows for Relaxing Price Controls

China's Premier Wen Jiabao
Wen Jiabao, China's premier. Photographer: Nelson Ching/Bloomberg

China set a 2012 target for inflation that’s higher than economists’ forecasts, leaving room for fiscal and monetary stimulus and an easing of government controls on the cost of resources such as energy.

Premier Wen Jiabao yesterday unveiled a goal of about a 4 percent increase in the consumer price index, the same target as last year. By comparison, analysts at Bank of America Corp. forecast 3.5 percent and those at Goldman Sachs Group Inc. predict 3.1 percent. The gauge rose 5.4 percent in 2011.

China is moving to more market-oriented methods of setting prices to spur energy conservation by letting consumers bear a bigger portion of costs. Wen yesterday pledged pre-emptive fine-tuning of economic policy, a shift from a year ago, when his main warning was on inflation, a “tiger” he said would be tough to recapture if allowed free.

The government “wants to push forward energy price reform and wants the room for that to happen,” said Li Wei, a Shanghai-based economist for Standard Chartered Plc, the U.K. bank that earns most of its profit in Asia. Li forecast 2 percent inflation this year.

The 4 percent inflation goal is “conservative,” and the full-year rate may be about 3 percent, Li Daokui, an academic adviser to China’s central bank, told reporters today.

Growth Target

Stocks and copper declined yesterday after China cut the economic-growth target to 7.5 percent from an 8 percent goal in place since 2005, a signal that leaders aim to cut reliance on exports and capital spending in favor of consumption.

The MSCI Asia Pacific Index fell 0.9 percent as of 11:52 a.m. in Tokyo today after sliding 1 percent yesterday on the prospect of China putting a smaller emphasis on growth. The yuan weakened less than 0.1 percent against the dollar to 6.3093.

China may “appropriately” widen the yuan’s trading band to better reflect market supply and demand, the official Xinhua News Agency reported yesterday, citing People’s Bank of China Governor Zhou Xiaochuan. That signals policy makers may reduce dollar purchases that limit gains in the exchange rate, said Jeremy Brewin, who oversees about $4 billion of emerging market debt at Aviva Investors in London.

China’s new target suggests a switch from a previous view that the nation needed a minimum of 8 percent growth. As recently as 2010, Wen said that an 8 percent expansion was necessary for “basic stability of employment,” and anything lower will create “problems,” according to an article in the Communist Party’s Qiushi magazine.

Fewer Entrants

Barclays Capital says the government can afford slower growth because fewer people are entering the workforce than before, perhaps 4 million to 5 million a year, rather than as many as 10 million, according to Chang Jian, a Hong Kong-based economist for the bank.

The Chinese government is targeting average economic growth of 7 percent a year during the so-called 12th five-year plan period, which covers 2011 through 2015. Such goals have been routinely exceeded and growth reached 14 percent as recently as 2007, when the target was 8 percent, according to the statistics bureau.

The “relatively high” 4 percent target for inflation “means the government leaves itself enough room for pro-growth policies and also room for raising utility prices,” Lu Ting, a Hong Kong-based economist at Bank of America Corp., said in a report yesterday. There’s “plenty” of room to boost fiscal spending without breaching the budget-deficit target of 800 billion yuan ($127 billion), he said.

Power Company Losses

China’s price controls lead to distortions, especially in energy markets. While power­generating companies have to buy coal at market rates, they must sell their output at regulated prices that don’t always cover costs. Forty percent of power generating companies that use coal lost money in 2010, according to the China Electricity Council.

Refiners have posted losses from making gasoline and diesel as controls on fuel prices prevent them from passing on higher crude costs.

PetroChina Co., the country’s second-biggest refiner, said yesterday that losses from processing crude last year were larger than expected by the company.

“Losses are widening,” Chairman Jiang Jiemin said in Beijing. “We can’t see a turnaround in the situation. It’s larger” than the 50 billion yuan predicted, he said.

New System

To help narrow such losses, China is planning a new system to let retail fuel prices track global crude costs more closely.

The World Bank and a Chinese government researcher issued a report last week urging the nation to enact “breakthroughs in core reforms” to loosen state control of the economy, including “pricing reforms for natural resources” such as energy and raw materials.

Besides letting the government ease price controls, moderating inflation allows for measures to boost growth. Wen, 69, reiterated yesterday that the government will maintain a “proactive” fiscal policy and a “prudent” monetary policy while making “timely and appropriate anticipatory adjustments and fine-tuning.”

The government in February lowered banks’ reserve requirements for the second time in three months to boost lending and sustain growth, following five interest-rate increases from October 2010 to July 2011 aimed at slowing price increases that reached 6.5 percent in July, the highest in three years.

Holding Off

China has held off on rate reductions even as central banks in Asian nations such as Indonesia and the Philippines have made cuts. The U.S. Federal Reserve in January pledged to maintain low interest rates through at least late 2014, while the Bank of England increased its asset-purchase target in February by 50 billion pounds ($79 billion).

“In projecting a CPI increase of around 4 percent, we have taken into account imported inflation, rising costs of factors of production and people’s ability to absorb the impact of price increases, while leaving room for the effect of price reforms,” Wen said yesterday.

Consumer prices prices probably rose 3.4 percent in February from a year ago, based on the median estimate of 26 analysts surveyed by Bloomberg News before data due March 9. Inflation unexpectedly accelerated to 4.5 percent in January on the boost to spending from the weeklong Lunar New Year holiday.

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