Slower Growth Ahead

Mainland China's real GDP growth slowed further to 10.1% in 2Q from 10.6% in 1Q due to weakening external demand and soaring imports. For the first half of 2008, real GDP grew 10.4%. Domestic demand provided much of the growth momentum, with both fixed asset investment and retail sales rising strongly in the period. Consumer price inflation also dropped further to 7.1% in June due to slowing food price increases.
Easing inflation and weakening external demand mean that the government is unlikely to raise interest rates and tighten bank lending further for the rest of 2008 and possibly for 2009. But with inflation still high at 7.9% in the first half of this year, the central bank is unlikely to relax monetary policy either.

The government might use other measures, however, if external demand deteriorates too sharply as to jeopardize economic growth. To encourage exports, for example, the government may slow the pace of appreciation of the Chinese RMB against the US dollar or raise export tax rebate rates.

Overall, the Mainland's economic growth is projected to slow to about 9.2% in the second half of this year, giving an overall growth of about 9.8% for the whole of 2008. Depending on the pace of deterioration of the global economy, the Mainland's economic growth could slow further to 8% in 2009. Consumer price inflation, however, is likely to fall to about 5.5% in 2009 from about 7% this year.