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August 7, 2010

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Analysts warn of food inflation risks

THE trend of China's moderating economic growth has extended into July and will be reflected in July's key economic data released next week, analysts said.

The economy is broadly in good shape, moving in the same direction as anticipated by policy makers, some analysts said. But they cautioned that inflation may rebound.

"We expect the moderating trend in the second quarter will extend into July," said Wang Qing, a Morgan Stanley economist. "It has been reflected in the China Manufacturing Purchasing Managers' Index, which showed a low reading in July primarily due to seasonal effects and supply-side adjustment."

China Manufacturing PMI, a comprehensive indicator of industrial activities, slipped 0.9 percentage point from a month earlier to 51.2 in July.

Wang predicted China's industrial production will further ease to a growth of 13.5 percent last month, due to "high temperatures and the government's redoubled efforts in closing energy-inefficient industries."

Wang was not optimistic about inflation, although June's Consumer Price Index, a main gauge of inflation, eased from a month earlier.

"We forecast that CPI will rebound to 3.4 percent from 2.9 percent in June, driven up mainly by food inflation," Wang said.

He noted vegetable prices increased last month due to supply disruption after heavy rain and floods, while a low pig inventory triggered rises of meat prices.

Wang's estimation was echoed by other economists. Sun Mingchun at Nomura predicted July's CPI growth may range between 2.9 percent and 3.5 percent due to less food after so many natural disasters last month. A poll by Sina.com which interviewed nearly 20 analysts also showed that a 3.2 percent CPI rise was projected for July.

Li Maoyu, an analyst at Changjiang Securities Co, said strong trade growth may soften last month, reflected by fewer new export orders in the PMI subindex, which fell to 51.2 in July from 54.4 in April, and a high comparative base.

Against the backdrop of moderating domestic demand and softening international commodity prices, import growth is also expected to slow, Li said.

Fixed-asset investment growth may weaken further after the government tightened property policies.




 

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