Moderate economic slowdown helps restrain inflation

13:09, June 08, 2011      

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China's purchasing managers index (PMI) in the manufacturing sector reached 52 percent in May, down 0.9 percent compared to the previous period, according to data recently released by the China Federation of Logistics & Purchasing. The obvious decline of PMI is the latest sign of China's economic growth slowdown.

Most experts believe the trend that China's GDP growth rate will fall in the second quarter of 2011 has appeared, but the number may still remain at about 9.5 percent. While the CPI in May is widely believed to remain high, the slight economic growth slowdown will help to ease inflation pressure. However, compared with other countries, China's economic growth still maintains a faster and steady momentum.

No need to worry about economic hard landing risks

China's GDP growth rate began to fall back steadily after it reached the peak of nearly 12 percent in the first quarter of 2010. China saw a year-on-year GDP growth of 10.3 percent, 9.6 percent and 9.8 percent in the second, third and fourth quarters of 2010, respectively. The growth rate reached 9.7 percent in the first quarter of 2011, and it is widely believed to continue to fall in the second quarter based on analysis of market conditions.

China's domestic economic growth will further slow down under the regulation and control policies, said Lian Ping, Chief Economist of the Bank of Communications. He noted that the economic growth slowdown is mainly caused by the government's active regulation and control, such as the real estate control policies and the exit of automotive subsidies.

Ma Jun, Deutsche Bank's chief economist for China, said that regarding the components of GDP, the growth of fixed assets investment is not a concern, but the year-on-year growth rate of total retail sales of consumer goods will decline to a limited extent in 2011. The main reason behind the economic growth slow down is the obvious year-on-year decline in industrial added value, which may fall to 12 percent or even lower in a short period. Power shortages and inventory adjustments are factors resulting in the decrease of industrial added value.

However, experts also said that domestic forces driving economic growth are still sufficient and economic growth is unlikely to dip, so it is unnecessary to be overly worried about the risk for an economic hard landing in China.

Mei Xinyu, a researcher at the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce, said that as an asset bubble and inflationary pressure facing China's economy is so huge, China needs to make an effort to achieve a soft landing. These signs of an economic slowdown imply that the efforts to achieve a soft landing have started producing positive effects. However, economic slow down has neither kept China from remaining the fastest growing country among major economies, nor has it curbed the relative ascent of China's status in the international economic system.

Adjusting China's economic structure is beneficial

China is transforming itself from a "world factory" to a "world market" and from a commodity-exporting country to a "capital-exporting country" amid the current complicated global economic situation. Experts generally believe that slower economic growth is not much of a concern because the goal of the government's earlier regulatory measures was to slow the economic growth instead of simply seeking high economic growth. The change in economic concept or the transformation of the economic growth mode will benefit China's sustainable development.

Wang Xiaoguang, a researcher at the Chinese Academy of Governance, said that it was inappropriate for China to adopt excessive stimulus plans to maintain high-speed growth in the aftermath of the international financial crisis in 2008. The current economic slowdown is a positive trend, Wang said. China's economy needs an adjustment and should give up the investment and real estate sector-driven economic growth mode.

Hua Sheng, president of Yanjing Overseas Chinese University, also said that the government's move to lower macroeconomic targets is a good thing and China's economic slowdown will bring space for the transformation of the economic structure.

At the same time, experts noted that while maintaining steady economic growth, China should pay more attention to improving the environment and people's lives. Mei said that China has become the world's second largest economy, but it still faces many problems such as the unfair income distribution and poor environmental quality. It needs to make greater efforts to solve these problems to achieve sustainable economic growth.

Jing Ulrich, managing director and chairperson of China equities and commodities for J.P. Morgan, also believes that China's economic growth will slow down and will be more steady and balanced. In addition, the country will pay more attention to improving people's livelihoods.

Inflationary pressure to be eased

Due to the PMI decline in May, the Bank of Communications recently lowered its forecast for China's GDP growth in the second quarter of 2011 and in the entire year of 2011 both from 10 percent to 9.5 percent.

Mei said that inflation control measures are a major contributor to the slowdown in economic growth. The domestic inflationary pressure is about to peak and will soon begin to decrease after the bull market in commodities comes to an end.

Ma predicted that China's inflation will likely peak in June at around 6 percent and drop to 4 percent at the end of the year. The base effect, various monetary factors and sluggish food and real estate markets will jointly ease China's inflationary pressure in the second half of 2011.

Lian also noted that as credit tightening continues, the domestic demand is dropping, economic growth is showing signs of slowing, and international commodity prices are falling, which may reduce domestic consumer prices. Furthermore, the carryover effect tends to be weak in the fourth quarter, and both the PMI and PPI are showing signs of dropping, indicating that China's CPI will soon begin to fall.

But since time is still needed to effectively alleviate the inflation pressure, Wu Xiaoling, Associate Director of the Finance Management Committee under National People's Congress, expressed that the Central Bank will not loosen monetary policies after considering that the economy is only slowing down slightly and the inflation pressure is still severe. Analysts point out that affected by the regulation and control policies, China's economic growth rate will most likely slow down further.

Lian predicts that the policy of raising interest rates is coming to an end. The interest rates will be raised once more in June, but the probability of raising interest rates in the second half of 2011 is quite low. Meanwhile, the frequency of raising the deposit-reserve ratio will also decrease, and there will be larger room for using central bank bills as well.

By People's Daily Online,and the author is Zhou Yuan from People's Daily Overseas Edition.

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