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China's June inflation falls to 7.1%

(Agencies)
Updated: 2008-07-17 16:06

BEIJING -- China's inflation rate fell to 7.1 percent in June but is still "fairly high" and the country faces pressure for more price rises due to high costs for energy, grain and industrial materials, the government said Thursday.

"We are still facing pressure" for more price rises, a spokesman for the National Statistics Bureau, Li Xiaochao, said at a news conference. He gave no indication that Beijing considered the problem under control or whether it might raise interest rates or impose more drastic measures.

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The June rise in consumer prices over the same period of 2007 was down sharply from May's 7.7 percent rate and April's 8.5 percent rise. It came after months of government efforts to cool inflation by paying subsidies to increase food supplies and imposing price controls on food, fuel and other basic goods.

The government worries about the impact of fast-rising prices on China's poor majority, who spend up to half their incomes on food.

"Although headline inflation may have peaked for the time being, attention is now focusing on the build-up of inflationary pressure in non-food categories," Jing Ulrich, chairwoman of China equities for JPMorgan Chase & Co, said in a report to clients. "In the current environment, China's mid-stream processors, such as oil refiners and power generators remain vulnerable to higher input costs and price controls on their outputs."

The government gave no June figure for food prices, but said they rose 20.4 percent in the first half over the year-earlier period. JPMorgan estimated June's food price rise at 17.5 percent, compared with 19.9 percent in May.

Also Thursday, the government said China's booming economy grew by 10.1 percent in the three months ending June 30 over the same period last year. That was down from the previous quarter's 10.6 percent expansion, but Li said it was in line with government controls imposed in an effort to prevent runaway growth and inflation.

Slower growth could complicate Beijing's efforts to rein in inflation without causing an economic slump. Export growth plunged in June to 18.2 percent -- down from May's rise of 28 percent -- due to slowing global demand, prompting suggestions regulators might slow the rise of China's currency, the yuan, or take other steps to help struggling exporters.

But policymakers probably see 7.1 percent inflation as still too high and are unlikely to relax tight monetary policies, a step that could ignite new price rises, said Mingchun Sun, a Lehman Brothers economist in Hong Kong.

"These numbers show the economy still has momentum to grow. We need to keep in mind all this growth was achieved despite weakening global demand and very tight credit conditions in China," he said. "Growth is a concern, but probably still of lesser concern than inflation."

Chinese consumer prices began to rise sharply in mid-2007 due to shortages of pork and grain. The government initially expressed confidence inflation would start to fall by the end of that year. But efforts to rein in prices were hampered by severe winter storms that wrecked crops and disrupted shipping.

"Prices are still running at a fairly high level," Li said.

Separately, China's main planning agency, the National Development and Reform Commission, said inflation in housing prices, another key government concern, slowed slightly in June but that costs in 70 major cities still were up 8.2 over the year-earlier period.

Li said the government's recent decision to raise prices for fuel and electric power to curb fast-rising consumption could fuel inflation. He noted that wholesale prices rose 8.8 percent in June over the same month last year -- an increase from May's 8.2 percent rise -- adding to pressure on retailers to pass on higher costs to consumers.

Chinese leaders want to maintain high growth to reduce poverty but are trying to squelch a boom in bank lending and construction. They worry that runaway investment could ignite a debt crisis or fuel pressure for higher inflation.

Li, the statistics bureau spokesman, acknowledged the government was struggling to strike a balance between high growth and inflation.

"I think the tricky thing for us is to find the ideal balance point," he said.