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China's CPI likely to drop below 2%, more economic spurs expected

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BEIJING, Aug.6 (Xinhuanet) -- China's economy is to see a continued slowdown and the government will implement more economic stimulus in the future.

China's GDP expanded at 7.6 percent in the second quarter of 2012, the first time that the world's second largest economy's growth has fallen below the 8-percent mark since the fourth quarter of 2009.

To boost the currently fatigued economy, China's top leaders reaffirmed that they will underline stable economic growth and adhere to a proactive fiscal policy and prudent monetary policy to counter the current economic hardships.

The ongoing pace of economic growth is within expectations, but the external environment remains grim and poses difficulties and challenges, according to a newsletter released after a meeting of the Political Bureau of the Communist Party of China (CPC) Central Committee that was presided over by President Hu Jintao on Tuesday.

"We should observe the problems and risks, strengthen risk awareness and make good preparations," read the newsletter.

"We should remain firmly confident in our efforts to promote steady and relatively fast economic growth," it said.

Moreover, most of leading Chinese economists also expressed high confidence in an optimistic economic outlook in the second half of this year.

A quarterly survey, conducted by the China Economic Monitoring and Analysis Center under the National Bureau of Statistics, showed that 72 percent of 78 leading economists expected higher than 8 percent growth this year supported by further economic policies.

The continued low consumer price index (CPI), a main gauge of inflation, pushes the government to introduce more pro-growth measures, respondents thought.

The previous stimulus policies have shown their effects, the economic growth is expected to rebound gradually, but at a moderate pace, they added.

To buoy the economy, China has adopted a train of growth-spurring measures, including lowering banks' reserve ratios and interest rates, subsidizing energy-saving household electrical appliances and speeding up approvals for major construction projects.

Many economists even predicted that the CPI may drop to 1.7 percent in July from June's 2.2 percent, to reach its lowest level in 30 months.

CPI to fall below 2 percent in July

China's CPI will probably fall below 2 percent in July due to the base effect, giving authorities more room to beef up monetary supply to support growth, according to the latest bank estimations.

If no unexpected factors arise in the third quarter, the CPI may reach 2 percent during the July-to-September period, predicted Lian Ping, chief economist at the Bank of Communications.

Food prices, which account for nearly one-third of the prices used to calculate China's CPI, may stay flat in July compared with June, as rain and flooding affected vegetable production in many places in a traditionally peak season of supply, the financial research center of Bank of Communications projected.

Meanwhile, Chinese central government has strengthened its monitoring of farm produce prices.

On July 26, President Hu Jintao called for more efforts to ensure agriculture production and stabilize jobs.

"Favorable policies should be implemented in order to boost crop output, farmers' incomes and the agricultural modernization drive," Hu said.

China's manufacturing sector grew at its slowest pace in eight months, with the purchasing managers index (PMI) for the sector easing to 50.1 percent in July, down 0.1 percentage points from the previous month, according to official survey results published on Wednesday.

"The decline in PMI continued to narrow in July, reinforcing signs that the country's economy is stabilizing," said Zhang Liqun with the Development Research Center of the State Council.

Zhang forecast a recover in market demand, saying "boosted by pro-growth policies, future market demand is expected to pick up slightly. Companies may no longer face reduced orders, and the economic growth will stabilize or accelerate."

"At present, the most pressing task for China is to make a steady transition from an annual growth rate of around 10 percent to 7 to 8 percent," Zhang said.

Li Daokui, head of the Center for China in the World Economy under Tsinghua University and a former central bank adviser, believed that the country's economy is "showing healthy signs of stabilization."

"We are confident that China will see U-shaped economic recovery in 2012," Li said.

"To seek steady growth amid adversities, China should focus on promoting reforms, accelerating economic restructuring and improving people's livelihood," according to Li.

Further RRR cut possible

As CPI is expected to slow to less than 2 percent in the third quarter, there will be more room for monetary policy easing, a research note from JPMorgan Chase & Co said on Tuesday.

To confront the faster-than-expected slowdown, the central bank is likely to further reduce the reserve requirement ratio (RRR), the money that lenders should set aside in reserves, in August to shore up the softening economy, said Lu Zhengwei, chief economist with China's Industrial Bank.

China's central bank has cut the RRR three times since November of last year. It also reduced benchmark interest rates for the first time since December 2008 in June and further reduced the rates earlier this month.

Despite a worsening of the external outlook, China still has ample room to respond forcefully, using fiscal policy as the main line of defense, according to an IMF report released in July.

The yuan hit its lowest level against the dollar this year on Tuesday after falling nearly 1 percent to the bottom of its daily trading band.

"The renminbi is assessed to be moderately undervalued, reflecting a reassessment of the underlying current account, slower international reserves accumulation, and past real effective exchange rate appreciation," the IMF report said.

More monetary easing expected

Last week, Chinese Premier Wen Jiabao urged to adopt various monetary policies in order to ensure the steady and moderate increase of currency loans.

Wen stressed that "concerning the domestic economy, the most obvious problem is that economic downward pressure is still relatively big."

Echoing with the government's decision to prioritize stable growth, the People's Bank of China (PBOC) on Thursday announced to implement the prudent monetary policy and make the policy more future-focused, targeted and flexible

It will take "the proper time" to fine-tune the country's monetary policy, according to a quarterly report released by the bank's monetary policy analytic team.

Efforts should be made to push the financial service sector to benefit the real economy and create a stable monetary and financial environment to maintain stable consumer prices and promote economic restructuring, the report said.

PBOC will also steadily push forward the market reform of the interest rates' formation system and improve the renminbi's exchange rate mechanism to strengthen its two-way flexibility, according to the report.

China is widely expected to loosen its monetary supply further to inject more gas in the tank to propel its slowing economy, analysts noted.

The central authorities may intensify credit offers to cash-strapped businesses, said Guo Tianyong, professor at the Central University of Finance and Economics.

The government last Tuesday vowed to expand domestic demand, develop the real economy, accelerate reforms and improve people's living standards over the rest of the year.

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