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China's industrial growth slows, inflation jumps

business Updated: Aug 11, 2010 11:22 IST

China's industrial growth slowed further in July as Beijing clamped down on a credit boom, bolstering expectations it will ease monetary policy to shore up its economic expansion. Inflation spiked to its highest level this year as summer flooding wrecked crops but analysts said the increase will likely prove temporary.

The government data on Wednesday added to signs China's booming economy is cooling and fueled expectations Beijing needs to reverse course after imposing lending curbs this year to prevent a bubble in stock and real estate prices.

"This tells us economic growth is continuing to slow," said economist Zhu Jianfang of Citic Securities in Beijing. "If they don't make changes, the economy will see a danger of further sliding."

Economic growth slowed from a blistering 11.9 percent in the first three months of the year to 10.3 percent in the second quarter as Beijing rolled back its stimulus and clamped down on bank lending. Chinese leaders say they want to steer growth to a more sustainable level, but the slowdown was sharper than many analysts expected.

July growth in factory output slowed for a fifth month to 13.4 percent over a year earlier, its lowest level this year. Retail sales and investment in factories and other fixed assets also slowed.

The consumer price index, or CPI, rose 3.3 percent over a year earlier, its fastest rate this year as summer flooding wrecked crops and disrupted shipping. The jump was driven by a 6.8 percent surge in food costs.

But analysts expect inflation to fade quickly. "July's CPI reading is likely to mark the high point for the year," said Tom Orlik, an analyst for Stone & McCarthy Research Associates, in a report.

"With price pressures set to fade, the government will be free to focus on supporting growth."

Growth in spending on factories, real estate and other fixed assets in the first seven months of the year fell to 24.9 percent, down from 25.5 percent for the first half, the National Bureau of Statistics reported.

Retail sales rose 17.9 percent, down from 18.2 percent growth for the first half of the year.

Demand for steel, cement and other building materials has faded as Beijing winds down its 4 trillion yuan ($586 billion) stimulus fades, which pumped money into the economy with higher spending on building public works.

An array of other indicators from manufacturing orders to auto sales also show growth steadily declining.

July housing prices held steady from June levels in a sign the government's lending curbs were working. But that easing has come at the cost of a slump in sales and construction.

Also in July, growth in exports fell to 38.1 percent from June's 43.9 percent.

Manufacturing also is under pressure from a government mandate to improve energy efficiency. The government this week ordered 2,087 steel and cement mills and other factories that are deemed too wasteful to close by the end of September.