China sacrifices growth to satiate inflation dragon


If inflation is a dragon that must be slain, China’s Premier Wen Jiabao has shown he is willing to sacrifice a part of the country’s most vital asset to do so — growth.
Cutting China’s 2012 economic growth target to 7.5 percent at the start of the annual meeting of parliament last week says clearly that too rapid an expansion makes inflation too tough to contain, given the reforms needed to create widespread wealth.
That he did so in the week it was revealed that the annual rate of inflation in February receded to a 20-month low of 3.2 percent, barely seven months after being twice that at a three-year peak of 6.5 percent, speaks volumes about the gravity of price risks.
“The fact that we’re talking about the question recognizes the fact that it’s not a slam-dunk that the inflation beast has been tamed,” said Jeremy Stevens, China economist at Standard Bank in Beijing.
“The average January-February inflation rate is 3.9 percent and only a fraction below the government’s target for the full year,” Stevens told Reuters. “Most people believe that in the second half of the year the inflation rate picks up again.”
The growth and inflation trade-off is particularly pointed for Wen and the Communist Party leadership which justifies its one-party grip on power with the promise of stability and prosperity for the country’s 1.3 billion people, of whom most are poor and an estimated 10 percent live on less than $1 per day.
The country’s economic ascent has increasingly concentrated riches in the hands of an urban elite in the last decade, during which China has become the world’s second biggest economy and accumulated $3.2 trillion of official reserves — the largest store of foreign wealth on the planet.