Currency Reform and Inflation Highlighted at 2012 National Peoples’ Congress Meeting

In a news conference following an annual parliament session today, Premier Wen Jiabao said that China will increase efforts to reform its currency program, in order to allow the yuan to float more freely. Noting that in the Hong Kong market non-deliverable forwards (NDFs) had begun to fluctuate both ways, Wen said that this is an indication that the yuan may be near a balanced level. He went on to offer his assurance that authorities will step-up exchange rate reforms.

With both Premier Wen Jiabao and President Hu Jintao retiring next year, the 2012 National Peoples’ Congress meeting was the last they would be attending in their current capacities. At the opening of the meeting, Wen had announced a cut in China’s annual economic growth target, setting it at 7.5 percent, being an eight-year low. This was done partly to create some leeway in rebalancing the economy, and reduce price pressure in the run-up to the transition of leadership to take place later this year.

With the focus on providing credit to small and medium-sized companies, the slower growth will give Beijing the opportunity to reform crucial price controls while at the same time keeping control of the inflation level and maintain an expansionary monetary policy. In 2011, inflation remained above the four percent target, hitting a high of 6.5 percent in July. While 2012 is only two-months old, Wen has kept the inflation rate below the government set target at 3.9 percent. Growth and inflation levels are key to stability, particularly when taking into account that the majority of the 1.3 billion people living in China are poor, with an estimated ten percent of the population surviving on less than US$1 per day. Rising food prices are particularly detrimental to this group.

With the United States struggling to boost consumer spending and the European Union battling with debt problems of some of its member states, foreign demand for goods produced in China’s manufacturing sector has dropped. It is estimated that at least 200 million jobs in China are reliant upon foreign-funded investments and overseas demand for products.

Recently released data revealed that China’s trade balance in February dropped US$31.5 billion into the red, while inflation eased and bank lending, industrial output and retail sales all showed an unanticipated cooling, indicating that the world’s second biggest economy was slowing down. Economists generally agree that 2012 is likely to be the slowest full year of growth recorded in the ten years that Hu and Wen have been in power. Time will tell if this is the case.