Earlier this month, China concluded its National People’s Congress. Some important changes are afoot in the country. For the 12th plan period, the Chinese government has emphasized quality of growth rather than the quantum of growth. Growth target for the next plan period (2011-15) has been set at 7%. For the last plan period, that target was 7.5%, which was comfortably exceeded. The growth rate for the first year of the plan period was set at 8%. This should mean that the government aims to let the economy grow at a rate slower than 7% in the remaining four years of the plan period. Not many are taking this seriously. They should.

Taking note of global developments, China’s leaders stressed quality of growth, reduction of income inequality, price stability and environmentally sustainable growth. As if on cue, China earlier this month reported a large trade deficit in February. The last time it reported a trade deficit was March 2010. But for the deficit before that, one would have to go back all the way to the first four months of 2004.

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That might seem like a century ago, but it would be good to jog our memories a bit to find out what happened in 2004. There were widespread concerns of a Chinese slowdown. Inflation spiked up from 2% in January 2004 to around 5% by the middle of the year, and stayed there until September before it started coming down. The RRR (required reserve ratio) on banks shot up from 6% in September 2003 to 7.5% in April 2004. The RRR is now at 19.5%. In the first half of 2004, Asian stocks, outside of Japan, dropped 15% peak to trough.

The question is whether China is set to experience the same kind of slowdown that it did in 2004, or a worse one. This time, the tightening in China has taken place on all fronts— liquidity (RRR hikes), monetary policy (three interest rate hikes) and administrative measures. However, what complicates the process of drawing a conclusion is that February was the month of the Lunar New Year. Hence, any analysis would have to wait to see if February trade numbers were an aberration. Export and import numbers to all countries were down in January, and export and import of all commodity groupings were down in January too. Something more serious than the Lunar New Year effect might be at play here.

Perhaps China has tightened excessively and the latest trade data might force the country to take its foot off the brake pedal. Such hopes were quickly dashed by the China consumer price inflation data for February released a few weeks ago.

China’s annual consumer price index inflation for February was 4.9%, a tad higher than the consensus expectation of 4.8% and much higher than the whispered number of 4.4%. Of course, it is comfortably above the 4% inflation target of the government. That itself was revised higher from the previous annual average inflation rate target of 3%.

It is not a surprise for many Asian countries, notably China, to find themselves in the grip of a persistently high inflation rate. While global factors such as a loose and expansive monetary policy in the developed world, led by the US, have played a part, domestic policy settings have compounded the problem.

Recovery from the global financial crisis required loose monetary and fiscal policies from the regional governments. But they might have let them stay for too long. China’s credit creation in 2010 was higher than that in 2009, despite public vows to rein credit growth in.

The delayed effects of the previously rapid and rampant credit creation would be difficult to avoid. That is what is happening now. Hence, it is important to accept that high consumer price inflation is not just a story of food price inflation, nor is it a story of price spikes around the Lunar New Year, as many economists would have you believe.

China does not appear in denial of the challenges it is facing based on the statements one hears from senior government leaders. But the risk in a command economy set-up is that one could be overly loose or overly tight with much less scope for calibrated and continuous tightening or easing that could happen spontaneously with reliance on market instruments.

It is not clear to us that the rest of the Asian countries have priced in the risk of much lower growth in China than the consensus forecast of 9-10% for 2011. They, more than China, might be caught by surprise by a weaker Chinese economy.

As for the fond hopes in many Western capitals that the jasmine revolution would spread from West Asia to China, Bare Talk thinks that the soil is more fertile in the US for that than in China.

V. Anantha Nageswaran is chiefinvestment officer for an internationalwealth manager. These are hispersonal views. Your comments are welcome at baretalk@livemint.com