Economy grows 10.4%, inflation eases

By Dong Zhixin (chinadaily.com.cn)
Updated: 2008-07-17 10:45

A shopper buys vegetables at a market in Beijing July 14, 2008. China's CPI rose 7.9% in the first six months this year, the National Bureau of Statistics announced in Beijing Thursday, July 17, 2008. [Agencies]

China's economy slowed down for a fourth straight quarter as inflation eased in June, official figures showed on Thursday, giving more ammunition to advocates for a looser monetary policy.

The Gross Domestic Product (GDP) grew 10.1 percent in the second quarter after rising 10.6 percent in the first three months, said Li Xiaochao, spokesman for the National Bureau of Statistics at a press conference in Beijing. China's economic growth has been on a steady decline since peaking in the second quarter of 2007.

NBS chief economist Yao Jingyuan said the double-digit GDP growth indicated China's economy was still growing at a steady and relatively fast pace.

"The cooling of GDP growth indicated the government's macro-economic policy to prevent the economy from going overheated has paid off," said Yao. The slowing world economy and weaker demand on international markets also adversely affected the Chinese economy.

Another widely watched indicator, the Consumer Price Index (CPI) -- an important measure of inflation, moderated to 7.1 percent in June after rising 7.7 percent in the previous month thanks to easing food prices.

The combination of economic slowdown and easing inflation may give rise to louder calls for an ease in the monetary policy.

Analysts said that the tight monetary policy put in place at the end of last year has brought about great difficulties for many firms, especially private ones. Thousands of small and medium enterprises have gone bankrupt in the coastal areas as they could hardly get loans from banks, reports said. Fast appreciating yuan value, rising cost of labor and raw materials are also key reasons for the situation.

As the world's largest developing country, China needs fast economic development to maximize employment.

However, any ease in monetary policy will be a tough call, in face of inflation pressure.

"In spite of falls in the consumer prices in the last two months, the prices are still running at a relatively high level," Li Xiaochao said. "We will continue to prevent prices from rising too fast and curb inflation."

Adding to the price pressure, the Producer Price Index (PPI) continue to jump, rising to a three-year high of 8.8 percent in June over a year earlier after increasing 8.2 percent in the previous month.

The PPI measures the prices at the factory gate level and is usually used to predict future CPI level, as retailers or manufacturers will eventually pass the rising cost to consumers.

Inflationary expectation is also a major concern. "With the rapid price increases in the global market, the public will have expectations for further price rises, " according to Li.

If consumers expect prices to rise, they will ask for pay increases, or rush to buy products, thus exerting further upward pressure on prices.

Li also cited the recent petrol and electricity price increases, as well as post-quake construction which will increase the demand for building materials.

These concerns may be part of the reasons why the finance committee of the National People’s Congress, China's parliament, pledged on Wednesday to maintain its tight monetary policy for the rest of the year.

However, watchers sensed a softening of words in its description of the fight against inflation. The committee said curbing price pressures would be a "prominent task" in the months ahead, instead of "top priority," phrasing that economic leaders repeated in the early months of 2008.

Analysts believe policy makers are trying to find a balance between inflation and economy growth and are gradually shifting towards preventing a major economic slowdown.