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Staying the course in trough of uncertainty

By Xin Zhiming (China Daily)
Updated: 2008-07-15 10:21

There is also abundant liquidity in the economy, she said. Expectations of higher inflation have increased, following months of the CPI rising above 8 percent and the latest round of oil price hikes.

At the same time, higher input costs including higher imported commodity prices have been reflected in higher manufacturing goods prices, with the hikes possibly getting transferred to consumer products.

Despite the pressures, inflation may decelerate to about 5.5 percent by the end of this year, Wang said.

"While we fully recognize the risks and challenges facing China's economy, we are not as pessimistic as some about either growth or inflation," she said. "In reality, the Chinese economy has been growing remarkably strong under the circumstances."

Many also see the economic slowdown as something that has been desired for many years because of the strain swift economic expansion has had on the country's environment and resources.

The current economic slowdown is largely the result of policymakers' "pre-emptive measures" from last year, when the economy showed signs of overheating, said Wan Donghua, senior official of the National Bureau of Statistics.

"It's unnecessary, therefore, to over-react to the slowdown," he told a recent forum.

Still, for those looking to more signs on the direction of the economy, the complexity of the situation remains a major factor.

"The Chinese economy may not be at its worst, but it is certainly facing a most tricky time," said Guo Tianyong, economist with the Central University of Finance and Economics.

Some of those who have been worried by the moderation of the Chinese economy have gone so far as to warn that China may suffer from stagflation, or stagnation entangled with inflation.

The recent visits of central leaders to a number of provinces to monitor local economies have also helped fuel such sentiment.

Analysts said the visits mark a possible turn in the stance of central policymakers, who had previously insisted on tightening monetary policy to cool off a red-hot economy and control inflation.

"Based on the recent comments of the visiting leaders, overheating is no longer a policy priority," said Liu from China Merchants Bank. "They are more concerned about the risk of an economic downturn."

Such a risk is said to be substantial, at least when seen from the external side.

In the US, repercussions from the subprime crisis seem to be stabilizing, but economists have not ruled out the possibility of it deepening. In a worst-case scenario, a new bout of financial turmoil may lead to problems not only in the Western economies, but also in Asia, said Sun Mingchun, economist with Lehman Brothers in Hong Kong.

International capital may withdraw from some Asian economies if their fundamentals worsen, with Vietnam's recent experience being a case in point, he said.

"In my opinion, the US economy may continue to slow in the third quarter," said Zhang Liancheng, head of the School of Economics of the Capital University of Economics and Business. "It is set to affect China's exports."

The authorities, therefore, need to seek a balance between economic growth and inflation control, which should be the top priority of policymakers, said Xia Bin, director of the Financial Research Institute of the State Council's Development Research Center.

"I think macroeconomic control will be fine-tuned in line with the situation," said Qiu from the Bank of Communications.

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