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China's Central Bank Sees Growth Up, Inflation Over Target

Chinese consumer inflation will average 3.2% this year, exceeding the central bank's target, as gross domestic product growth ticks up to 10.8%, the bank's research department forecast
on Friday.

In a report carried by the official China Securities Journal, it said consumer price inflation, which hit a 27-month high of 3.4% in May, was likely to reach 3.5% in the third quarter before subsiding to 3.2% in the fourth quarter.

By December, the annual rate of inflation is likely to have dropped to 2.5%, the report said. Consumer prices rose a year-average of 1.5% in 2006.

The central bank has said its maximum comfort level for inflation is 3% rate and it has been tightening policy steadily to keep a lid on prices and excess liquidity.

The research department forecast GDP growth of 11.0% in the first half of this year. GDP expanded 11.1% in the first quarter and 10.7% in all of 2006.

The research report said higher global prices for oil and non-ferrous products, along with higher prices for domestic resources and labor, would push up inflation.

China's drive to thin out energy-intensive industries would force manufacturers to close down outdated capacity, reducing the supply of steel, power and non-ferrous products and increasing upward pressure on prices, it added.

But the bank's researchers said that pork and grain prices, which were behind the acceleration in inflation in the first part of the year, had only limited scope to rise further.

Government efforts to ensure stable supplies, together with strong incentives for farmers to raise more animals and reduced demand in the hot summer months, would lead to a stabilization of meat prices by September or October, it said.

A bumper summer harvest would also help to put the brakes on grain prices, it said.

The report said investment growth would remain brisk given the strong incentives for local governments to spend, high corporate profits and Beijing's efforts to build more power stations, energy production facilities, roads and railways. "It is estimated that investment growth may rebound; the speed may pick up in the second half of 2007," it said.

The researchers said growth in China's trade surplus would slow in the second half of the year as exports weakened and imports picked up. It provided no specific forecast.

Retail sales would grow at least 15% this year.

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