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Economist: Guard against investment fever

By Wei Tian  (China Daily)

13:17, July 19, 2012

A steel production line in Ganyu, Jiangsu province. A Bank of Communications report predicts China's GDP will pick up in the second half after slowing to 7.8 percent in the first half of the year. (Photo / China Daily)

Bank forecast says nation's economy will still expand 8 percent this year

China needs to find a balance between supporting a slowing economy and too much stimulus that may further unbalance the economy, the Bank of Communications said on Wednesday.

"Currently, China faces more risks from inflation than deflation," said Lian Ping, the bank's chief economist.

Lian said global demand may improve in the second half, as the eurozone stabilizes, and the United States and Japan experience moderate recovery, which will reduce the pressure on China's exports.

Domestically, he said, a healthy job market and growing individual incomes suggested that the economic slowdown is still under control.

"Policymakers should guard against possible investment fever caused by misused stimulus funding, as well as a possible rise in prices after economic growth rebounds," Lian said.

Despite 7.6 percent GDP growth in the second quarter, the world's second-largest economy will still expand by 8 percent this year, according to the bank's Economic and Financial Outlook for the second half.

But this year will also mark the turning point in the country's potential growth. "In the long term, growth will be lower than the current level," Lian said.

"In the second half, the government should make more efforts to strike a balance between inflation and growth, as well as the shrinking revenue of the banking system amid interest rate reform," Lian said.

According to the bank's estimate, newly added yuan holdings for foreign-exchange purchases, an indicator of capital flows, may fall significantly to 1 trillion yuan ($157 billion) this year from 2.8 trillion yuan in the previous year.

Foreign purchases in the first half of the year, which were slightly more than 300 billion yuan, were only one-seventh of the amount in the same period last year.

The decrease will be a result of the shrinking trade surplus and less foreign direct investment, as well as weakening demand for foreign exchange settlement as expectations of renminbi appreciation diminish.

The trade surplus will continue to decline to $150 billion this year, while FDI will be around $120 billion, according to the bank's forecast.

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