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.
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.
The consensus in the latest Reuters poll is that inflation will be within the government's 4 percent forecast for the year.
But with a dip down to 3.1 percent by Q3, the implication is for a rebound in the last quarter, a worry for policymakers as most of the anticipated fall in the rate of inflation in the first half will come from the base effects of last year's surge.
Societe Generale economists calculate that fully 1.2 percentage points of the 1.3 point fall in the January to February inflation rate came from base effects.
HSBC, the bank which confidently declared that the "inflation story is over" in a note to clients after data on Friday showed February year on year consumer price inflation at 3.2 percent, seems to be hedging its bets.
Its China economics team expects at least 100 basis points of cuts in reserve ratio requirements (RRR) from the People's Bank of China (PBOC) for the rest of 2012 after cuts of 50 bps last month and in November 2011.
That compares with the market consensus of 150 bps more and arch-rival Standard Chartered's 200 bps call to keep the economy gliding as growth slows.
"The point is to make sure there are smooth liquidity conditions that are supportive to growth, but not necessarily a very aggressive easing that would invite future inflation risks," HSBC China economist, Sun Junwei, told Reuters.
In other words, a decision to ease monetary policy is not necessarily about having snuffed out inflation risks at all.
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