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Q1 Economic Growth Stable
Cover Stories Series 2012> Q1 Economic Growth Stable
UPDATED: April 16, 2012 NO. 16 APRIL 19, 2012
Solid Foundation
China's first-quarter economy continues to grow but challenges lie ahead
By Hu Yue

BUILDING SPREE: A low-rent housing project in Jinjiang, southeast China's Fujian Province. China is accelerating the pace of affordable housing construction. Those investments are expected to help shore up the slowing economic growth (ZHANG GUOJUN)

The Chinese economy remains on solid footing, though a string of economic indicators have brought back talks of a downturn.

Its GDP grew 8.1 percent year on year to reach 10.8 trillion yuan ($1.71 trillion) in the first quarter of 2012, slowing from 8.9 percent of the fourth quarter of 2011 and 9.2 percent of the whole year of 2011, said the National Bureau of Statistics (NBS).

"China has left the worst of liquidity shortages behind it, and there is a time lag before the pro-growth policies gain traction," said Ba Shusong, Deputy Director of the Research Institute of Finance at the Development Research Center of the State Council.

"The economy is likely to bottom in the second quarter before rebounding in the fourth quarter this year," said Ba.

"Renewed concerns of an economic hard landing in China are unjustified, as the country's service sector remains quite resilient," said Lu Ting, an economist with the Bank of America Merrill Lynch. "The faltering manufacturing industry is part of the whole economy and susceptible to changes."

The manufacturing sector accounted for 47.6 percent of the first-quarter GDP, while agriculture and services accounted for 6.4 and 46 percent, respectively, according to the NBS.

While export growth is expected to further decelerate, China's consumption will remain relatively resilient, driven mainly by stable income growth, stable confidence in domestic demand and an increase in pension payouts in 2012, said a report by Bank of America Merrill Lynch.

Lian Ping, chief economist with the Bank of Communications Ltd., said the Chinese economy is set for a bright future due to deep growth potential.

"Massive urbanization, industrialization and market reforms will continue injecting fresh life into the economy," he said.

"Meanwhile, the less-developed central and western regions are catching up quickly by receiving industries transferred from east coastal regions," he said.

Inflation eases

Now it seems that inflation is no longer an acute headache for the Chinese economy as the consumer price surge has showed signs of cooling down, but the possibility of a comeback in inflation cannot be ruled out.

The consumer price index (CPI), a barometer of inflation, grew 3.6 percent year on year in March, 0.4 percentage points higher than in February. But the figure represented a remarkable decline from 5.4 percent for the entire year of 2011.

The biggest driver of CPI was still food prices, up 7.5 percent from a year ago in March. Pork prices, in particular, skyrocketed 11.3 percent.

The producer price index (PPI), an effective gauge of inflation at the wholesale level, declined 0.3 percent in March, hitting a 28-month low. The index climbed 6 percent last year.

"Inflation will surely taper off markedly this year as powerful government measures to increase food supplies and reduce market speculation are taking root," said Zuo Xiaolei, chief advisor to president of the Beijing-based China Galaxy Securities Co. Ltd. "The CPI is expected to stay at 3.5 percent this year, well below the government-set target of 4 percent," she said.

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