Official figures released by the Central Government show that recent tightening measures are starting to bite. Measures targeting the property sector, local government financing vehicles and manufacturing industries with overcapacity problems have started to cool down economic growth on the mainland, which should alleviate inflation pressure to some extent. Although concerns over the negative impact of property and loan tightening seem to have intensified lately, it is still unlikely that a marked relaxation of policy will come about in the short term.

China's economy has rebounded spectacularly since the 2008 financial crisis, growing by more than 11 percent in the first half of this year. However, conditions may be much tougher in the second half amid weaker global demand and negative effects arising from the tightening measures. Some recently-released official data provide evidence of this.

First of all, retail sales showed a further slowdown from the 18.3 percent rise (all percentages are on a year-on-year basis unless specified otherwise) in June to 17.9 percent in July. Excluding the price factor, real-term growth actually saw a more significant decline. The deceleration in retail sales growth is also a reflection of the negative impact of the government's tightening policies on the property sector. Most durable goods related to housing and automobiles have suffered from lower growth during the past two months - a situation which is likely to intensify in the latter part of the year.

Meanwhile, the value-added industrial output (VAIO) index climbed 13.4 percent in July, a lesser pace than the 13.7 percent in June and 16.5 percent seen in May. The rising comparison base and tightening policies on property and other sectors with excess capacity led to slower growth in most heavy industries, while the strong rebound in exports supported production in most light industries.

This marks the first time light industries exceeded heavy industries in terms of VAIO growth since mid-2009. The change in the divergence between the two could point to a further slowdown in VAIO growth going forward. Amid tightening in the property sector and in highly-polluting energy resource-intensive manufacturing industries, VAIO growth is expected to decline from 17.6 percent in the first half to 12.7 percent in the third quarter and 10.6 percent in the fourth quarter.

Growth in urban fixed-asset investment (FAI) also eased to 24.9 percent in the first seven months from 25.5 percent in the first six months and 25.9 percent in the first five months. Property investment growth also slowed from 38.1 percent in the first half to 37.2 percent in the first seven months. Amid Beijing's tightening measures towards local government financing vehicles, infrastructure investment has also seen slowdown in the past few months. Looking forward, urban FAI may continue to somewhat mitigate this while full-year growth is expected to remain at about 22.5 percent.

The Consumer Price Index (CPI) saw an increase of 3.3 percent in July, in line with market expectations. The base effect contributed 2.2 percentage points or 67 percent to the CPI's year-on-year rise in July while food items dominated the price-hike charts. CPI registered a month-on-month rise of 0.4 percent, mainly driven by a jump in food prices, especially those of vegetables, eggs and pork in flood-stricken areas of the country. Uncertainties related to grain and pork prices may add fuel to inflation down the road. However the significant slowdown in economic growth and the base effect, on the other hand, should alleviate some inflation pressure in the second half. CPI growth is expected to stay above 3 percent in the third quarter and then decelerate to 2.5 percent in the fourth quarter.

The author is executive director of BOCI Research Ltd. The opinions expressed here are entirely his own and do not represent BOCI or any other affiliated companies within the group.

(HK Edition 09/04/2010 page2)