China's Wen signals doubt inflation goal can be met

By Victoria Bi and Donny Kwok

(Reuters) - Chinese Premier Wen Jiabao signaled for the first time that China would struggle to meet its 4 percent inflation target this year, underlining expectations that interest rates will rise further even as economic growth slows down.

Wen, who is traveling in Europe, was quoted by Hong Kong media on Monday as saying that while he sees the Chinese economy growing above 8-9 percent this year, it was hard for China to keep inflation under 4 percent in 2011.

"China's financial situation will still be among the best in the world this year, with economic growth kept above 8-9 percent, and CPI controlled under 5 percent," Wen told Hong Kong television media during the England leg of his Europe tour.

Wen's latest comments sounded somewhat less sanguine than his remarks on Friday, when he said China's inflation was firmly under control this year and should cool steadily. However, they may not alter investors' thinking about monetary policy.

Many economists had assumed China would overshoot its 4 percent target given that the inflation rate has stayed well above that mark since January, and is expected to peak at 6 percent in June or July.

Inflation rose in May to a 34-month high of 5.5 percent.

Economists polled by Reuters in June predicted China would stay in a tightening mode, raising its benchmark lending rate by one-quarter of a percentage point and its deposit rate by a half-point this year.

Investors are watching carefully to see whether Beijing can ease inflation without stifling growth. A string of disappointing readings on factory activity and exports raised concerns that China's economy may be slowing down more sharply than expected.

Copper prices lost ground on Monday in part because of concern that inflation pressures may prompt top buyer China to tighten credit further.

A sharper China slowdown would be particularly damaging for global growth now that the U.S. economy looks shaky and Europe is mired in a sovereign debt mess.

China is keen to keep prices in check to preserve social stability. Food and energy prices have been the primary culprits behind the steep inflation rate, and that tends to hit lower-income households the hardest.

STAYING THE COURSE

Judging by a recent stream of comments from Beijing, the market's bias toward tighter policy in China appears to be in step with that of the Chinese government.

Vice Premier Li Keqiang said on Saturday that fighting inflation was still China's top priority, effectively rebutting arguments among some investors that China could face a hard landing if it over-tightens when growth is already slowing.

Wen also took a stab at worries that China's economy risks a hard landing on Friday when he said China is "fully capable" of keeping its economy growing briskly.

Writing in an opinion piece in the Financial Times, Wen said: "There is concern as to whether China can rein in inflation and sustain its rapid development. My answer is an emphatic yes."

The economy grew 10.3 percent in 2010 and in the first quarter that pace eased to 9.7 percent.

China's central bank has made clear that its focus is squarely on inflation.

It raised banks' required reserve ratio to a record 21.5 percent earlier this month, hours after the May inflation data was released. The higher reserve ratio means banks have less money available for lending, which policymakers hope will help to cool growth and inflation.

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