Bloomberg News

Wen Sees China Inflation Capped at 5% by Tightening Steps

June 26, 2011

(Adds economist’s comment in fourth paragraph.)

June 27 (Bloomberg) -- Premier Wen Jiabao said China can keep full-year inflation within 5 percent, affirming forecasts that price gains will slow in the second half from the fastest pace in almost three years.

“I see difficulties in reaching the full-year inflation target of 4 percent,” Wen said in comments broadcast today by Hong Kong-based Cable TV. “But it still can be kept below 5 percent after the efforts we have made.” He spoke at a Chinese community event in London, the broadcaster said.

Stocks in Shanghai rose for a fifth day as Wen’s comments signaled that the government is confident of subduing inflation that accelerated to 5.5 percent in May, the fastest pace since July 2008. The central bank has paused for more than 11 weeks in raising interest rates, the longest gap since increases began in October.

“Inflation may start to soften after June, and in the fourth quarter the rate is likely to drop below 5 percent,” said Li Cui, a Hong Kong-based economist at Royal Bank of Scotland Plc. “For the annual average to come below 5 percent is more challenging.”

Societe Generale SA estimates that the inflation rate may be 6.5 percent this month.

The Shanghai Composite Index rose 0.2 percent as of 11:13 a.m. local time, after climbing the most in four months on the previous trading day.

Profits Climb

Industrial companies’ profits rose 28 percent in the first five months from a year earlier even as the government tightened credit, a statistics bureau report showed today.

Wen said that China’s economic situation will remain “the world’s best” if growth is about 8 percent or 9 percent and inflation is below 5 percent. He reiterated concern at the risk that rising prices can pose to social stability, cautioning that, combined with corruption, they can have an “impact on the stability of a political power and the peacefulness of a society.”

Separately, the premier said China will keep investing in Europe’s sovereign bond market, providing a vote of confidence in the region roiled by the debt crisis.

“China has actually increased the purchase of government bonds of some European countries, and we haven’t cut back on our euro holdings,” he told the British Broadcasting Corp. yesterday in an interview. These acts “show our confidence in the economies of Europe and the euro-zone.”

Bank of America Merrill Lynch says that the government will boost interest rates only once more this year as officials steer the economy to a “soft landing.” The central bank has raised borrowing costs four times since September as the government reins in credit to limit inflation and the risk of asset bubbles.

“The overall price level is within a controllable range and is expected to drop steadily,” Wen wrote in the Financial Times newspaper last week.

--Editors: Paul Panckhurst, Ken McCallum.

%CNY

To contact the reporter on this story: Sophie Leung in Hong Kong at sleung59@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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