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China's economy on track for gradual slowdown in H2 as gov't reiterates policy stance

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China's economy is expected to head toward a gradual slowdown in the second half of this year, as the central government has stated that it will retain its current mix of tightened economic policies.

Top officials from the Political Bureau of the CPC Central Committee agreed at a Friday meeting that the country will stick to its proactive fiscal policies in the second half of this year, with stabilizing prices as its main priority.

China's government is currently trying to balance the need for healthy growth with attempts to control inflation.

Government data shows that the country's economic growth slowed to 9.5 percent in the second quarter of this year from 9.7 percent in the first quarter and 9.8 percent for the fourth quarter of last year.

However, the slowdown is coupled with rising consumer prices, with inflation reaching 6.4 percent in June, its highest level in three years. The consumer price index (CPI), a main gauge of inflation, jumped 5.4 percent year-on-year in the first half of 2011.

The government is targeting an economic growth rate of 8 percent for this year and plans to keep annual consumer price increases at around 4 percent. X To put a lid on price hikes, the central bank has raised its benchmark interest rates three times this year and increased its reserve requirement ratio six times, ordering banks to keep a record high of 21.5 percent of their deposits in reserve to drain excessive money out of market.

However, the tightening measures have ignited fears of a hard economic landing and resulted in financing difficulties for small- and medium-sized enterprises, which are the country's most significant sources of employment.

HSBC said Thursday that its preliminary purchasing managers index (PMI) for China dipped to a 28-month low of 48.9 in July. It fell below the 50-point level for the first time since July 2010, pointing to a monthly contraction of the country's manufacturing sector for the first time in a year.

The bank said the decline was caused by policy tightening and slack global demand weighing on economic growth.

Sheng Laiyun, a spokesman for the National Bureau of Statistics, said this month that the possibility of the economy dropping sharply is very low, as there is still a strong driving force behind China's economy.

China's officials agreed Thursday that the economy is developing in the expected direction under the government's macroeconomic controls, with more self-initiated growth instead of the expansion that was spurred by the previous economic stimulus.

"Under the government's control, China's economic growth is likely to continue to ease, but will generally stay in 'normal' territory," said Zhu Baoliang, an economist with the State Information Center, a government think tank.

He attributed the gradual moderation to a continued investment growth slowdown, as the country's prudent monetary policy gives less support to investors than the relatively loose monetary policy that was previously in place.

The economic slowdown in the second half will probably be bigger than that of the first half of this year, but there is no need to panic, he said.

He said that he expects the economy to expand by 9 percent year-on-year in the second half of this year.

China's economic development is now shifting to self-initiated growth, which is positive and necessary for its economic restructuring, said Liu Shucheng, an economist with the Chinese Academy of Social Sciences, another government think tank.

The government should not relax policies because of a slowdown in growth, or inflation will accelerate and economic restructuring will be set back, he said.

The central government pledged Friday that it will maintain stability and continuity in its fiscal policies during the second half of this year in order to ensure steady economic development.

It also reiterated that containing prices will remain at the top of the government's agenda in the period.

Officials and experts agreed that China's inflation peaked in June and will ease in the second half, as the government is working to remove the factors that have been pushing up prices.

Liu said CPI growth is expected to start declining in July and will be more evident in the fourth quarter of this year.

Inflation in China is approaching a turning point, said Zhou Wangjun, vice director of the National Development and Reform Commission's pricing department.

He said he is "optimistic" about consumer prices in the second half of the year.

However, there are still some pricing uncertainties. China is now facing significant inflationary pressures, said Zhang Xiaojing, a researcher with the Chinese Academy of Social Sciences, citing soaring pork prices, unstable oil prices and higher labor costs as major challenges.

The International Monetary Fund projected earlier this week that China's economy will grow by 9.6 percent this year, propelled by rising exports and increasing domestic consumption.

Inflation in China will ease in the second half of this year, provided that no food shortages occur and the government maintains a prudent monetary stance, the IMF said.

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