Chinese policymakers are trying to strike a very fine balance in monetary policy.

After some seemingly hawkish moves in the past few weeks, Chinese policy makers adopted a dovish tone on Tuesday by easing the consumer inflation target to 4 percent for 2011, reported Reuters, citing Chinese state television.

Earlier, officials set the cap for new bank loans for 2011 at 7.5 trillion yuan.

 

In 2010, the new loans cap was also 7.5 trillion yuan and the inflation target was 3 percent, so from this perspective, monetary policy is more dovish in 2011. 

 

Reuters pointed out that 4 percent is hardly unprecedented -- China's inflation target was about 4.8 percent for 2008.

 

However, the Chinese economy is still contending with a possibly overheated real estate sector.  Moreover, food inflation, which threatens the basic living standards of the poor, has already soared to 11.7 year-on-year for November. 

 

In the past few months, China did hike the bank reserve requirement ratio to record highs and raised interest rates for the first time since 2007, so it has taken some steps to cool inflation.

 

However, if Tuesday's move signals that China will be less aggressive than previously thought in combating inflation, the Chinese economy, Chinese equities, and global commodities will all get a boost.

 

Email Hao Li at hao.li@ibtimes.com