Chinese Premier Wen Jiaobao said yesterday at the World Economic Forum that "China would not withdraw stimulus policies at an inappropriate time". Which means, it is too early to exit from the expansionary policy now. But it also suggests that "when time is right, we will exit." This is subtly different from his language that used last few months that "we would resolutely implement the stimulus policy". We think the actual thinking, based on our discussion with govt officials, is that "although we are not changing our official policy tone now, but we need to prepare for the exit." The timing of the exit depends on GDP and CPI numbers. We expect yoy Q4 GDP growth to reach 10.5%, and December CPI inflation to rise to close to 2% yoy (up from current -2%). This set of numbers may justify a change in policy tone from "expansionary" to "prudent" at the end of the year or early next year. If inflation rises to around 3% as we predict in late Q1 or early Q2, it should then be the time for the first rate hike, in our view.

Also, Premier Wen said yesterday that "we need to be aware of and guard against the inflation risk." It is significant that this is the first time Wen has publicly mentioned inflation risk since the beginning of the crisis. We think it is a clear indication that inflation will become the single most important reason for triggering an eventual macro policy shift in China.

• [Editor:editor]