In the midst of a weak global economy, the National People's Congress has laid out the economic framework for China this year.

The market is also looking for any advice from policymakers to soothe the current bear market, as many investors believe that a market sell-off would lead to a drop in consumer spending and further slow down the economy.

However, past experience suggests that the authorities are trying to avoid any market intervention and let the market forces determine the stock prices.

As expected, the government is clearly favoring social and welfare spending over the traditional cyclical infrastructure spending. However, inflation is the major policy headache cautioned by Premier Wen Jiabao.

The snowstorms in January and February increased the headline inflation rate to such a high level that the market is expecting an immediate rate hike, especially when the authorities have reiterated their strong intention to bring inflation under control.

The Consumer Price Index (CPI) accelerated in February to 8.7 percent, up from 7.1 percent in January, after the snowstorms damaged food supplies and transportation systems in many provinces.

Food prices surged 23 percent, which contributed to 90 percent of the month's inflation. The fresh-vegetable prices jumped 46 percent in February, while the price of pork jumped 64 percent.

However, in the non-food categories, most of the items showed stable trends that hovered around the targeted 4.8 percent.

We believe a rate hike is very unlikely unless it is absolutely necessary.

Firstly, the United States Federal Reserve will continue to cut interest rates which further widen the gap and limit the scope for a rate hike. Secondly, a rate hike could create further negative market sentiment to the weak market which the government is trying to avoid. Thirdly, the inflation spike in January and February was largely due to the snowstorms - a supply factor that monetary policy is not equipped to handle.

Lastly, even though the authorities have reiterated their determination to tackle inflation, they have also emphasized that the interest rate policy should be used "prudently" and in line with domestic and external economic and financial conditions.

The policymakers are looking for a delicate balance between tackling inflation and avoiding policy over-tightening in light of the global economic slowdown.

We believe that headline CPI inflation peaked in February as the food inflation eased primarily on the high base, and the positive supply response is expected to show an impact in the second quarter.

Furthermore, there are other measures at the authorities' disposal to manage inflationary expectations and ease the negative impact on the people most affected by the high prices.

The author is a director of Convoy Asset Management Limited.

(HK Edition 03/25/2008 page2)