Confused about whether controlling prices or supporting growth is the top priority for China’s government? You are in good company. A look at the recent statements of Premier Wen Jiabao suggests the confusion goes right to the top.
Back in June, the latest data showed the increase in consumer prices leveling off at 5.5% year-to-year. Mr. Wen declared early victory in the fight against inflation. Writing in an opinion piece in the Financial Times on June 23, he said: “China has made capping price rises the priority of macroeconomic regulation and introduced a host of targeted policies. These have worked. The overall price level is within a controllable range and is expected to drop steadily.”
That seemed a bit premature and a few days later on 26 June Mr. Wen was striking a more cautious note. He admitted that the government’s 4% target for the CPI might be out of reach, and said the government must “put stabilizing prices at the forefront.”
In July, the data for June showed consumer prices rising higher than expected, up 6.4% year-to-year. The premier remained on the inflation warpath, saying in a statement on July 12 that the “overall direction of policy is unchanged” and reiterating the commitment to cooling prices (in Chinese). But a few weeks is a long time in a tempestuous global economy, and in August the focus of attention shifted again. With the recovery in the U.S. and Europe looking fragile and financial markets in freefall, a statement from the State Council on August 9 struck a dovish tone.
In the statement, the State Council – which is chaired by Mr. Wen – focused on risks to the global recovery and omitted mention of price stability as the main priority of macro-economic policy (in Chinese). Despite inflation coming in at a three year high of 6.5% for July, the markets interpreted that omission as a sign the tightening cycle was drawing to a close.
The premier’s latest statement, which came in remarks published in the official Qiushi magazine at the beginning of September, suggested a shift back in the other direction. Mr. Wen said that the slowdown in growth had been the “appropriate” result of previous tightening measures and that stabilizing prices was still the government’s top priority (in Chinese).
But eagle eyed analysts noticed signs that the premier’s statement also revealed concern over the risks of excessive tightening, with a section focused on the risks facing the real economy from higher input costs, labor costs, electricity shortages and an appreciating yuan. It was important, Mr. Wen said, “to prevent the lagged impact of monetary policy and other factors having an excessive impact on the real economy in the period ahead.”
Paul Cavey, China economist at Macquarie, says that part of the reason for the mixed messages is genuine confusion amongst China’s leaders about what to do. “Pre-crisis China could achieve super-high rates of GDP without much inflation,” Mr. Cavey wrote in a note to clients. “But that period of Goldilocks now seems in the past. As a result, policymaking now involves trade-offs, and the mixed comments of Mr. Wen likely reflect a government grappling with just where to strike the balance between jobs and prices.”
Adding to the confusion; different interest groups within China’s own government have conflicting ideas on where the balance should be struck. Inflation hawks at the People’s Bank of China would dearly love to keep the focus on stabilizing prices. The pro-growth lobby – composed of China’s local government, industry, and real estate sector – would prefer it if Mr. Wen loosed the reigns.
Who will win the argument? The jury is still out. But the pro-growth camp might get a little support when inflation data for August is released this Friday. The consensus forecast of economists polled by Dow Jones is for the increase in consumer prices to ease down to 6.1% year-to year, from 6.5% in July – weakening the case for a continued focus on tightening.
– Tom Orlik
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