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Prices continue to drop

CHINA'S consumer and producer prices continued to dive last month while exports also remained low, which makes the relatively easy monetary policy still necessary to sustain an economy supported mainly by domestic demand, analysts said.

The Consumer Price Index, the main gauge of inflation, fell 1.8 percent from a year earlier in July, extending the decrease for the sixth straight month and posting the biggest drop since 1999. It fell 1.7 percent in June and 1.4 percent in May.

The Producer Price Index, the factory-gate measurement of inflation, slumped 8.2 percent on an annualized basis last month - a record low since data were collected in 1992, according to the National Bureau of Statistics today.

"Judging from the declining trend of the CPI and PPI, the inflation is not an imminent threat right now and the government should stick to a moderately easy monetary policy to keep economic growth steady," said Hao Daming, an analyst at China Galaxy Securities Co. He predicted the CPI won't turn positive until next year.

Meanwhile, China's exports, the hardest hit sector by the global economic meltdown, increased 10.4 percent in July to US$105.4 billion from June but are still 23 percent down on last July, said the General Administration of Customs today. It compared with year-on-year drops of 21.4 percent in June and 26.4 percent in May.

It was the first month this year that exports exceeded US$100 billion.

July's surplus was US$10.6 billion, compared with US$8.2 billion in June and US$13.4 billion in May.

"China's exports remain volatile and it is hard to predict when the sector can walk out of the shadow of the weak global demand. So at this time, the government can't change its policy stance which helps to boost domestic demand - key to sustaining the economy," said Li Maoyu, an analyst at Changjiang Securities Co.

China's first-half gross domestic product has 7.1 percent higher than the same period a year earlier, with the rate accelerating to 7.9 percent in the second quarter from 6.1 percent in the first three months.

The People's Bank of China said last Friday it would not set quotas on new loans to rein in liquidity and the "finetuning" of monetary policy did not mean a shift in the current policy.

On Sunday, Premier Wen Jiabao reiterated that there was no upcoming change to the active fiscal policy and relaxed monetary settings, which had effectively shored up domestic demand.

China's urban fixed-asset investment gained 32.9 percent from a year earlier in the first seven months, 5.6 percentage points quicker than the same period last year but down 0.7 percentage point from the figure in the first half.

Retail sales in July rose 15.2 percent year on year to 993.7 billion yuan (US$145.5 billion), 8.1 percentage points slower from a year earlier but 0.2 percentage point quicker compared with that in June.

Wang Qing, an economist at Morgan Stanley, said there won't be any big changes in policy for at least 10 months.

"We expect a gradual policy shift: the current stance should remain broadly unchanged toward year end and turn neutral at the beginning of 2010 as the pace of new bank lending normalizes," Wang said.

"Policy tightening in the form of base interest rate increase or reserve requirement increases is unlikely until the middle of the next year."


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