China sticks to inflation goal of around 3 per cent for 2020

China has decided to keep its inflation target unchanged this year at around 3 per cent, sources said, suggesting policymakers will continue to roll out economic stimulus gradually and avoid more aggressive measures.

Some analysts have speculated that Beijing will raise the inflation target to 3.5%, which would give authorities more room to support the world’s second-largest economy as growth tails off to the slowest in nearly 30 years.

But policy sources told Reuters the government expects surging food prices to start easing in the second half of the year, as the government takes steps to address meat shortages.

The 2020 inflation target, to be unveiled at the annual parliamentary session in early March, was endorsed by top leaders at the annual closed-door Central Economic Work Conference last month, according to three sources with knowledge of the meeting’s outcome.

“The target will still be around 3%”, one of the policy sources said. “We cannot rule out the possibility that inflation may break 5% in the coming months but that could be short-lived”.

The State Council Information Office and the National Development and Reform Commission - the state planner, did not immediately respond to Reuters’ requests for comment.

China’s consumer price inflation (CPI) accelerated to a near eight-year high of 4.5% in November, as meat prices doubled due to a massive outbreak of African  fever, but producer prices have remained in deflation for five straight months.

The diverging price trends have complicated policymakers’ efforts to revive activity without risking overstimulating the economy.

While Beijing has rolled out a series of support measures in the last two years, mainly in the form of higher infrastructure spending and tax cuts, leaders have pledged they will not embark on massive stimulus like that during the 2008-09 global crisis, which created a mountain of debt that is still weighing on the economy.

China has kept its inflation target at around 3% since 2015.

While food prices have spiked, with staple meat more than doubling over the past year, there has been little sign of a pick-up in inflation across the broader economy, suggesting demand remains sluggish. Core inflation - which excludes food and energy prices - has stayed largely subdued.

“Currently, the CPI rise is mainly due to meat prices - this is a structural, not a broad-spread price rise. Meat prices could start to fall in the second half,” said a second source.

Still, the government may face a tough job in keeping inflation below 3% this year, policy insiders said.

Rising inflation expectations could reinforce the government’s cautious approach to further monetary policy easing, but Beijing’s supportive stance remains intact, sources said.

On Wednesday, the central bank announced its eighth cut since early 2018 in banks’ reserve requirements (RRR), or the amount of cash that banks must hold as reserves, in a bid to shore up the economy.

Analysts expect at least one more RRR cut this year.

The People’s Bank of China (PBOC) has also begun lowering key interest rates in recent months, with more expected possibly before the end of this month, but the cuts have been far smaller than substantial easing in the United States and many other economies over the past year.

Policy sources have told Reuters that Beijing plans to set a lower economic growth target of around 6% in 2020, relying on increased state infrastructure spending to spur investment, construction and jobs. China’s third-quarter growth slowed to 6%, still among the fastest in the world but its weakest expansion since the early 1990s.

Meanwhile, China stocks slipped on Friday, but finished the first week of a new decade higher with a five-week winning streak as Beijing eased monetary policy to shore up the economy even as investors cheered a thaw in Sino-US trade tensions.

The blue-chip CSI300 index fell 0.2% to 4,144.96, while the Shanghai Composite Index slipped 0.1% to 3,083.79.

For the week, CSI300 was up 3.1%, while SSEC advanced 2.6%, both logging fifth week of gains in a row.

On the trade front, investors were expecting a signing of a Phase 1 trade deal between China and the US on Jan.15.

The market got another lift from Beijing’s latest policy support for the economy going into the new year.

China’s central bank said on Wednesday it was cutting the amount of cash that all banks must hold as reserves, releasing around 800 billion yuan ($114.76 billion) in funds to shore up the slowing economy.

Reuters