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Chen Dongqi, Deputy Director of the Academy of Macroeconomic Research under the National Development and Reform Commission, said the economy is still steering a steady course of growth.
"Investments remain buoyant, enabling the economy to gain a solid footing," said Chen. "Chinese consumers are also opening up their wallets, filling the gap left by tepid exports."
The economy may rebound in the third quarter if companies stop drawing down inventories and overall demands recover, he said.
Dong Tao, an economist at Credit Suisse, believes the central bank is in no rush to relax its policies for fear of fueling further property price increases. The government, he said, will unleash its spending power to prevent growth from slowing too much.
"Should the threat of a hard landing emerge, we can expect fiscal stimulus packages to come to the rescue, instead of monetary easing," he said.
"The economy is set up for growth. You've still got urbanization and industrialization to come and all the incentives at local government levels are aimed at encouraging growth," said Stephen Green, an economist at Standard Chartered Bank in Hong Kong.
A recent Deutsche Bank report also said China now faces five major downside risks—power shortages, slowing car sales, lackluster manufacturing industry demonstrated by the falling purchasing managers index, real estate market downturn, as well as monetary policy tightening.
"But those risks are not difficult to control and they are expected to subside after the summer," said the report.
Inflation conundrum
"Taming inflation remains a top priority for the government, even though economic growth continues to slow down," said central bank governor Zhou Xiaochuan.
"The vibrant Chinese economy is able to tolerate a degree of inflation," he said. "The central bank will further fine-tune its monetary policy tools to control inflation, maintain economic growth, ensure high employment and maintain its international balance of payments."
The consumer price index (CPI), a barometer of inflation, soared 6.4 percent in June from a year ago, hitting a 35-month record. In the first half of the year, the CPI went up 5.4 percent. Both figures were well above the government-set target ceiling of 4-percent inflation for the entire year.
The biggest driver of the skyrocketing CPI was food prices including grain, meat, eggs and vegetables, which increased 11.8 percent in the first half of the year over the same period last year. Residential costs went up 6.3 percent.
The producer price index (PPI), a major measure of inflation at the wholesale level, rose 7.1 percent in June and 7 percent in the first half of the year.
Lagging effect of the credit binge two years ago continues to flood the economy with excess liquidity and fuel inflation. Meanwhile, price surges in international commodities translate into higher PPI in China through trade links, which in turn feed into consumer inflation. More stubborn and persistent contributors to inflation are growing domestic land and labor costs.
Policymakers have been pushing all the buttons to tame inflation. The government has taken a prudent monetary stance this year, bidding farewell to the moderately loose policy adopted to counter the financial crisis. The People's Bank of China, the central bank, has ordered interest rate hikes three times and the reserve requirement ratio increases six times this year.
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