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Inflation may rebound in second half: PBOC

INFLATION may rebound in the second half of this year, the People's Bank of China said today, noting that it will maintain a stable policy to consolidate economic growth.

The decline in the consumer price index, the main gauge of inflation, may bottom out in the third quarter of this year, the central bank said today in a 10-page report made by its Financial Survey and Statistics Department.

"China's economy is at a critical stage. We should maintain the macro-economic policy's stability and continuity to consolidate the foundation for a rebound," the central bank said.

The CPI fell for a fifth month in June, decreasing 1.7 percent from a year earlier, the biggest drop since 1999.

But rising commodities prices and ample liquidity will add pressure on future prices.

China's credit growth still has several drivers including capital demand from new projects and the real estate market, the central bank said.

The central government has said on several occasions that it will continue with its easy monetary policy despite concerns bad loans will increase due to fast credit growth.

China issued 7.37 trillion yuan (US$1.08 trillion) of new loans in the first half of this year, up 4.9 trillion yuan from a year ago.

The first-half figure already surpassed the year's 5 trillion yuan target set in January. The ample liquidity has helped fuel economic growth and rebounds in the stock and property markets.

China's economy grew a faster than expected 7.1 percent in the first half of this year, with 7.9 percent growth in the second quarter.

The central bank's bankers' confidence survey showed that the credit demand index grew to 67.5 percent in the second quarter, up 7.15 percentage points from the fourth quarter of last year. The index also strengthened 0.84 percentage points from the first quarter, when new credit posted a record high.

New projects will trigger demand for future capital growth, the central bank said.

Meanwhile, the central bank also noted that banks' shrinking capital adequacy ratio and strengthening risk controls will curb rapid growth of new lending in the second half.

The slowdown of the launch new projects and the hoarding of capital may also help trim lending growth, the report said.

Nikhilesh Bhattacharyya, a Moody's associate economist, said the driving forces behind surging credit growth are fading.

"With the worst of the downturn behind them, the need for the authorities to stimulate investment via credit growth is fading," he said.


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