China’s Economic Growth Eases but Inflationary Pressure Remains High

July 14, 2011 Posted by China Briefing Reading Time: 3 minutes

By Vivian Ni

Jul. 14 – China’s economic growth eased slightly to 9.5 percent during the second quarter of this year, against the first quarter’s 9.7 percent. However, in spite of a series of tightening policies, inflation still remains a major challenge for the government, especially after the consumer price index (CPI) hit a three year high of 6.4 percent in June. Risk of inflation may also have led to a decline in consumption across several sectors, such as automobiles, furniture and electrical appliances.

The National Bureau of Statistics (NBS) yesterday reported China’s GDP at RMB20.4 trillion between January and June this year, a year-on-year increase of 9.6 percent. Following a record high CPI increase last month, the NBS also says the CPI has kept a growth pace of 5.4 percent over the past six months, requiring a stronger effort from the government to tame inflation and stabilize prices.

At yesterday’s NBS press conference, a journalist from China’s state television forecaster China Central Television showed strong interest in knowing if China’s economy will later enter an era of stagflation – the situation where inflation is high but economic growth is low – as the country’s economy has already shown a sign of slowing down but inflation does not seem to have come under control. In response to such concerns, NBS spokesperson Sheng Laiyun said the country’s current economic development – which is undergoing a model transformation from stimulus-dependent growth to independent growth – is generally robust.

Emphasizing that China’s growth over the past year has remained stable and rapid, Sheng believes the risk of a sharp drop in the country’s economic growth is small. He pointed out the drive for economic development is still strong, as local investment activity remains high. Private investments over the past half year surged by 33.8 percent, augmenting 8.2 percent faster than investments on fixed assets.

At the same time, Sheng admits China is very serious about reining in inflation. Looking for a balance among rapid and stable economic development, inflation control, and economic structural adjustment is the major challenge that currently faces China, Sheng added.

Concern over surging prices may be discouraging Chinese consumers from spending savings in some sectors, although disposable income of urban residents has seen a y-o-y increase of 13.2 percent in nominal terms and 7.6 percent in real terms. Automobile sales rose 15 percent, slowing down by 22.1 percent from a year earlier. Consumption on household appliances has also been cooling down, with furniture sales raising 30 percent and electric appliances sales growing 21.5 percent for an overall drop of 8.5 percent and 7.5 percent from their growth rates a year earlier, respectively.

China has been implementing a tightening monetary policy to fight the CPI increases. In addition to lifting banks’ reserve requirement ratios multiple times this year, the People’s Bank of China also raised bank interest rates last week for the fifth time since last October. What is more, the government has launched a series of restrictive measures – including restraining bank loan issuance to property developers – on the country’s real estate market, hoping to slow down climbing house prices.

However, investments in the property market are still sizzling over the past six months, witnessing a y-o-y increase of 32.9 percent. Foreign capital played a major part in property development during this time, accounting for 75.5 percent of the total development fund utilized by real estate enterprises.

As the journalist from China’s business TV is curious why the restrictive measures did not stop the rush towards property investment, Sheng said both the construction of affordable housing and development of previously stored lands have contributed to this round of development growth.

The question of another journalist from Dow Jones reflected the public’s speculation as to whether or not China will soon adjust its current tightening monetary policy, as the country’s macroeconomic and industrial growth has proved to be better than expected. Declining to offer a direct answer, Sheng said he is confident that related departments will make the correct decision depending on changes in the economic situation.

A recent series of themed reports on China’s major portal Tencent expressed concern over the country’s ongoing tightening monetary policy, which has started imposing pressure on small and medium-sized enterprises (SMEs). It is reported the prudent monetary policy has heavily restricted SMEs’ financing avenues and also considerably increased bad local loans.

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