Tags: China | Inflation | Price | Controls

China Inflation Goal Gives Scope for Relaxing Price Controls

Monday, 05 March 2012 11:29 AM

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 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.

Asian stocks declined yesterday as 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.

MSCI Falls

The MSCI Asia Pacific Index, which has gained for 11 straight weeks, fell 0.9 percent on the prospect of China putting a smaller emphasis on growth.

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.

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’s Losses

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.

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

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.”

Reserve Ratios

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.

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.

Budget Shortfall

China plans a budget deficit of 1.5 percent of GDP, Wen said. That would be the smallest gap in four years and compares with last year’s target of 2 percent of GDP, or 900 billion yuan, and the actual deficit of 850 billion yuan, a figure altered by the use of a so-called budget stabilization fund and shifting some local-government spending, according to the finance ministry’s report.

The Ministry of Finance in January gave preliminary budget data indicating a 2011 deficit of 519 billion yuan, or 1.1 percent of GDP.

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Monday, 05 March 2012 11:29 AM
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