Is China Weakening Its Stance On Inflation Fighting?

Wen Jiabao

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Chinese Premiere Wen Jiabao switched rhetoric, going from a strong stance against inflation, to talking of a need to balance price and growth risks.Specifically, he went from “fighting inflation as a top priority,” at his last council meeting, to “China should get ready to prevent risks,” today. This despite soaring consumer prices, with inflation rising to 6.5% in July.

Recent economic data however shows that Jiabao is right to be concerned about growth. Industrial production declined to 14% year-over-year in July, compared to 15.1% in June. On a month-over-month basis, growth in industrial production narrowed to 0.9% in July, from 1.4% in June. Meanwhile, investment growth has also been declining since May, with projects approved by the central government shrinking for the third consecutive month.

In a new report, Societe Generale analyst Wei Yao cites these data points and adds that the Chinese economy will face challenges in the coming months, with industrial production expected to slow on easing demand for Chinese goods.

The People’s Bank of China is looking to drain 83 billion yuan, or $12.9 billion from its money markets through a 28-day bond repurchase program. This comes after the central bank pumped 44 billion yuan into the banking system last week.

At the council meeting, Jiabao also gave his first official response to the turmoil in global markets after S&P’s downgrade of America’s credit rating. Reuters reports:

“We urged relevant countries to take responsible monetary and fiscal policies to cut fiscal deficits and properly manage the debt crisis, to ensure a stable performance of global markets and maintain investor confidence,” he was quoted as saying on state radio.

“The global community should improve the communication and coordination of their macro economic policies to realise sustainable, stable and balanced growth in the world economy.” 

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