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ECONOMY: September China Economy Report
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 altChina’s inflation falls further, giving more room for stimulus

 
China’s inflation rate decreased even more in July, heightening hopes for more economic stimulus. Consumer prices rose 1.8 per cent in July down from 2.2 per cent in June according to data released by National Bureau of Statistics of China on Thursday 09 August. 
 
Lower inflation gives Beijing more room to cut interest rates or take other steps to shore up economic growth which has slowed sharply this year, without the risk of igniting a new price spikes, according to AP News. 
 
"The numbers confirm that the door for more monetary easing is open," said Credit Agricole economist Dariusz Kowalczyk in a report.
 
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China's gross domestic product for the second quarter declined to 7.6% in July. It’s the lowest level since the height of the global financial crisis in 2009. At the same time, the International Monetary Fund reduced its 2012 growth forecast for China by 0.2 percentage points to 8%.  
 
Analysts say the slump has probably bottomed out and a recovery should begin in the second half. But Premier Wen Jiabao warned last month the economy still faces "relatively large" pressure to slow further. 
 
The slowdown has raised the threat of job losses and possible unrest as the ruling Communist Party tries to enforce calm ahead of a once-a-decade handover of power to younger leaders according to AP News. 
 
Beijing has responded to the slowdown by cutting interest rates twice since the start of June and pumping money into the economy through high spending on building low-cost housing and other public works according to AP news. 
  
The steady decline in inflation has prompted warnings that China might be entering a period of deflation, a potentially dangerous phenomenon. It can hurt the economy by prompting consumers to put off purchases in expectation of lower prices, causing a downward spiral of lower company revenues and wages according to AP news. 
 
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Analyst say, however, the decline is due largely to a fall in commodity prices that should be temporary, and inflation should pick up later in the year as growth rebounds.
 
"The data reflects downward pressure on prices coming from weaker commodities," said Kowalczyk. "We expect CPI inflation to rise from now on, reaching 3.8 percent at year end."
 

This slowdown is different from 2008

 
While China has been adversely affected by external factors like the Eurozone crisis, its current slowdown is mainly the result of internal structural issues, including a suppression of domestic consumption, says Patrick Chovanec, Finance professor at Tsinghua University.
 
"The main growth driver of the past several years has been an investment boom that was engineered in response to the global financial crisis," explains Chovanec, "and this investment boom is buckling under its own weight."
 
The Council on Foreign Relations (CFR) interviewed Chovanec and here’s the three main points.
 
• The main cause of China’s worsening slow down is an internal problem.
 
In 2008, the problem was due to the economic crisis in the US, which slowed down China’s exports. What’s happening now is mainly due to the main growth driver of the past, investment boom, which is buckling under its own weight. It's not sustainable, and it has given rise to inflation and now to bad debt, and that bad debt is dragging down Chinese growth. Of course, people pay attention to whether Chinese exports are rising or falling. It's relevant because if Chinese exports are very vibrant, that creates something of a cushion for the Chinese economy.
 
• If the slowdown is more internal, will it continue long term?
 
It really depends on what the Chinese leadership chooses to do. China’s leaders know that China needs to make this economic adjustment away from dependence on exports and investment-driven growth toward more domestic consumption-driven growth. 
 
I would add that there are lots of areas of potential growth in the Chinese economy- in agriculture, in services, in healthcare, in retail, in logistics. The problem is that that growth is not as easily achieved as pumping money and boosting investment
 
• What policy responses China should take to boost domestic consumption and steer towards sustainable growth?
 
China has been channeling resources to investors and producers who have been boosting production and therefore accelerated GDP growth. China has to re-balance the economy by giving these resources back to the household sector in forms of changing exchange policy, interest rate policy and the tax policy. 
 
However, the trouble is that in the process of the re-balancing, it will inevitably stop the 'known GDP growth formula' it takes vision and persistence to pursue this new option.
 

By Hyuk-tae Kwon
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