BEIJING China has said at every turn in the last half year that its top economic concern is inflation, but don't expect much in the way of monetary policy to tame prices unless they shoot up from their current levels.
Although inflation is skirting a 12-year high, it has been in the mid-8 percent range for a few months, and Beijing thinks salvation may be at hand with food prices on the wane.
Officials are also wary of an overly aggressive drive against inflation that would pile misery on manufacturers, already grappling with the global slowdown and rising commodity costs.
In other words, a potential drop in growth may weigh more heavily on Chinese leaders' minds than inflation at its current level, stubbornly high as it is.
"The issue right now is that the inflation is not running away," said Arthur Kroeber of the Beijing research firm Dragonomics. "What they're doing is trying to talk down expectations but, on a substantive basis, playing it a little bit cool."
Talking has seemed the thrust of China's game plan so far.
Beijing declared it would tighten monetary policy this year to tackle inflation and it has capped commercial lending as well repeatedly raised bank's mandatory reserves.
But it has not moved an inch on interest rates -- its most potent tool -- despite increasing them six times last year.
And price controls on food imposed in January have not been as draconian as some analysts initially feared. Plenty of wiggle room was built into the system, so food price inflation has stayed higher than 20 percent.
But nearly every speech by every economic leader for the past six months has trumpeted an assault on inflation, as if a pitched battle were being fought.
Just this week, Zhou Xiaochuan, China's central bank governor, said that while monetary authorities would help reconstruction after the Sichuan earthquake, they would remain unyielding in the face of inflation.
"The risk is always that inflationary expectations get built into the economy and get real momentum," said David Dollar, the head of the World Bank's Beijing office.
GROWTH BEFORE INFLATION?
Governments around the world face an acute dilemma whether to try to dampen inflation at the risk of hurting growth as the global economy slows.
The extent of the headache has been illustrated this week in Asia. Indonesia, the Philippines, South Korea and Taiwan have intervened to support their currencies in the hope of reining in imported inflation while obviating the need to raise rates.
China, however, has been consumed by caution, Stephen Green, Standard Chartered Bank's Shanghai economist, wrote in a recent note.
Not budging on rates, Beijing has also kept the yuan on a tight leash, letting it rise just 0.9 percent against the dollar over the past two months.
The dire warnings of exporters have found a ready audience in Beijing. And after a harsh winter in the south, unrest in Tibet and the Sichuan earthquake, the leadership may be wary of doing anything to rock the boat before the Olympics in August.
"Politics may well be trumping economics. The centre, of course, remains resolutely pro-growth," Green said. "If there was an economy in the world that could afford to tighten more it is China, given its already super-high level of growth."
There is no doubt that Beijing remains anxious about inflation. Runaway prices have sparked social unrest in China before, playing a key part in the 1989 Tiananmen protests.
Yet maintaining high growth is also a political imperative.
Millions of rural Chinese stream into cities every year in search of a better life, and only a fast-expanding economy can create the jobs for them.
The government's prime concern for now may be inflation, but that might change if growth drops out of the comfort zone, said Lu Zhengwei, a senior analyst at Industrial Bank in Shanghai.
"If inflation goes below 8 percent, the government would consider it manageable," he said. "But it will arouse serious concern if economic growth falls to below 10 percent before the third quarter."
Growth fell to 10.6 percent in the first quarter from 11.9 percent in all of 2007.
Weaker inflationary pressure from food would allow the government to proceed with long-awaited reforms to liberalize petrol prices, JPMorgan economists said in a note on Wednesday. That, in turn, would mean non-food inflation might average 3 percent on the year, up from the current 1.8 percent.
A moderate rate of inflation -- rather than the outright deflation that China experienced as recently as 2002 -- may actually be in Beijing's interest.
A fast-expanding economy like China, where productivity growth is about 6 percentage points higher than in the United States, should see nominal wages converge with those of developed countries over time.
There are only two routes to such convergence: exchange rate appreciation and inflation.
"If you don't want to let your exchange rate go up as fast as possible, you have to be willing to accept some inflation," Kroeber said. "Anywhere between 3 and 6 percent as an ongoing rate for China is probably fine."
(Reporting by Simon Rabinovitch; Additional reporting by Langi Chiang and Alan Wheatley; Editing by Tomasz Janowski)