If inflation is a dragon that must be slain, China’s Premier Wen

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 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.

Wen needs wages for the country’s 800 million mainly low paid workers to rise quickly enough to help bridge the chasm between rich and poor, while pursuing painful structural reforms to increase domestic demand and cut dependence on volatile exports and foreign capital inflows.

And, because inflation is the surest way to ignite the social unrest that most worries the Party — given that the poor spend almost every penny of their income on basic essentials — he must do it while keeping a lid on costs.

At least we know why Chinese stocks have been stagnating!

Source Reuters