BEIJING, July 17 (Xinhua) -- The Chinese economy is in a dilemma, struggling for a delicate balance between maintaining a healthy growth and taming inflation. The major economic indicators released Thursday dampened expectations for a shift in the nation's macro control polices, but some, manufacturers in particular, still call for a fine tuning.

    China's gross domestic product (GDP) grew 10.4 percent to 13.06trillion yuan (1.9 trillion U.S. dollars) in the first half over the same period last year, the National Bureau of Statistics (NBS)said on Thursday.

    The growth rate was 1.8 percentage points lower than the first half last year, or 0.2 percentage points lower than the first quarter of this year.

    The GDP included 1.18 trillion yuan generated by the primary sector, up 3.5 percent, 6.74 trillion yuan by the secondary sector,up 11.3 percent, and 5.14 trillion yuan by the tertiary sector, up10.5 percent. The growth rates were 0.5 percentage points, 2.4 percentage points, and 1.6 percentage points, respectively, lower than the first half last year.

    The bureau's chief economist, Yao Jingyuan, said the double-digit GDP growth indicated China's economy was still growing at a steady and relatively fast pace.

    "The cooling of GDP growth indicated the government's macro-economic policy to prevent the economy from overheating has paid off," said Yao.

    Last year, GDP grew 11.4 percent year-on-year with the risks of spiraling inflation and economic overheating rising. To cool the breakneck growth, China fixed its GDP growth target at 8 percent for 2008.

    The slowing world economy and weaker demand on international markets also adversely affected the economy, Yao added.

    NBS spokesman Li Xiaochao said on Thursday that the economic growth was "in line with macro-economic control targets" and was "achieved with painstaking efforts".

    GDP grew by 11.3 percent in the fourth quarter last year, 10.6 percent in the first quarter this year and 10.1 percent in the second quarter.

    "China avoided major ups and downs in economic growth in the first half of the year, with growth slowing steadily," said Li.

    With on-going industrialization and urbanization, China's economy would remain robust and vigorous, as the need to narrow regional disparities would continue providing opportunity for growth, according to Li.

    However, observers said the Chinese economy was still beset with problems, citing persistent price rises, uncertainties in demand abroad, squeezed corporate profit margins, difficulty in ensuring energy and power supplies, and undue expansion of foreign exchange reserves.

    Early July found Premier Wen Jiabao, Vice President Xi Jinping and Vice Premier Wang Qishan conducting field inspections on the economic situation in developed Jiangsu, Shanghai, Shandong and Guangdong. The frequency of such high-profile, on-the-spot researches by Chinese leadership in a short period of time has seldom been seen over the past 30 years. Observers believed this implied the grimness of the internal and external environment of the Chinese economy.

    SHADOW OF SLOWDOWN

    According to the national statistical bureau, fixed-assets investment nationwide amounted to 6.84 trillion yuan in the first half of this year, up 26.3 percent year-on-year. The growth rate was 0.4 percentage points higher than the year-earlier level.

    The total included 5.84 trillion yuan in urban areas, up 26.8 percent, and 996.6 billion yuan in rural areas, up 23.2 percent. The growth rates were 0.1 percentage points and 1.7 percentage points, respectively, higher than the year-earlier level.

    Retail sales stood at 5.1 trillion yuan nationwide, up 21.4 percent. The growth rate was 6 percentage points higher.

    The total included 3.48 trillion yuan in urban areas, up 22.1 percent, and 1.62 trillion yuan in rural areas, up 20.0 percent.

    Zhuang Jian, senior economist with the Asian Development Bank PRC Resident Mission, attributed the faster growth in consumption to expectations for future higher income of workers and more allowances for low-income earners upon enforcement of the new labor contract law and efforts by local governments to raise welfare for the needy.

    But the higher income would also affect the economy adversely, as it would translate into higher labor cost for enterprises. This will add pressure on corporate performance, which was already not so upbeat in the first half, some economists believed.

    Between January and June, major enterprises nationwide posted a16.3 percent growth in their value-added output, down 2.2 percentage points.

    According to the statistical bureau, the major loss-making industrial enterprises nationwide recorded 91.7 billion yuan in losses in the January-June period, up 56.1 percent on the same period of last year. The growth was nearly 50 percentage points higher than the year-earlier level.

    Major industrial enterprises reaped 1.09 trillion yuan in profits in the first five months of the year, up 20.9 percent year on year. The rate fell 21.2 percentage points from a year ago.

    Observers saw this as a signal for possible further economic slowdown. They considered employment targets would, more or less, increase corporate payrolls and enterprises' overall costs.

    In the first half year, 6.4 million people were added to employees nationwide, or 64 percent of the yearly target of 10 million which was more than the nine-million level set for each of the past few years.

    Moreover, the observers argued, foreign sales remained worrisome, although the other two of the three major driving forces of the Chinese economy -- investment and domestic consumption, were brisk over the past six months.

    The first-half foreign trade was 1.23 trillion U.S. dollars, up25.7 percent. The total included 666.6 billion dollars in export value, up 21.9 percent, and 567.6 billion dollars in import value, up 30.6 percent. The growth rate for export was 5.7 percentage points lower. The trade surplus decreased 13.2 billion dollars to 99 billion dollars.

    The slower growth of foreign sales was ascribed to ebbing demand abroad, which will remain uncertain for the coming months as concerns are mounting about credit risks in the U.S. financial regime. The credit risks have helped drive the U.S. economy down and many related economies worldwide into stagnation.

    Traditional manufacturing sectors, which had lower added value, bore the blunt in global price rises for raw materials, increasing labor cost and expediting the appreciation of the Chinese currency (which gained more than 7 percent against the U.S. dollar, in comparison with the 6.9 percent gain for whole of last year).

    For example, China exported 9.87 billion U.S. dollars worth of garments and accessories in June, down 15 percent from the same month last year. The clothing exports for the first six months went up only 3.4 percent to 49.96 billion dollars.

    Besides, Zhu Baoliang, deputy head of the economic prediction department of the State Information Center, said that the gloomy equity market at home would make it more difficult for enterprises. He added that more slowdown risks would lie in the possible outward flow of international short-term speculative funds.

    LINGERING INFLATIONARY PRESSURE

    China's consumer price index (CPI), a major inflation measurement, rose 7.9 percent in the first half year.

    Over the past 30 years, China experienced four major periods of inflation and one serious deflation. The highest CPI rise was 24.1percent in 1994. All of past major inflations were triggered mainly by domestic factors only. But this time, most experts believed, the inflation was ignited by external factors and was cost-driven.

    Though the Janunary-June index was lower than the 11-year-high 8.7 percent for February, the inflationary pressure would remain in the coming months, many believed.

    The fast growth of PPI, which measures the value of finished products when they leave the factory, will affect the CPI a few months later.

    Price rises for oil and farm produce worldwide would likely continue and shore up China's inflation, as the Chinese economy's reliance on the outside world is now more than 60 percent thanks to its 30-year-long opening-up.

    Meanwhile, prices of agricultural products at home, which were buoyed up by short supplies after the severe winter weather and the May 12 earthquake, will linger at a high level.

    The rapidly expanding foreign reserves, which pushed up the central bank's passive money supply, will add to the inflationary pressure.

    China's forex reserves, which is already the world's largest, stood at 1.81 trillion U.S. dollars at the end of June, including280.6 billion dollars increased in the past six months, with an average monthly increment of 46.8 billion dollars.

    Observers warned of an inrush of huge short-term speculative funds as the fast expansion was achieved in company with a slowdown in trade surplus growth.

    FINE TUNING SUGGESTED FOR MACRO CONTROL POLICIES

    China has undergone several major economic ups and downs since it started reform 30 years ago. Each of them was triggered by overheating, partly resulting from decentralization, or pricing policy shifts or forex system reform.

    Among ensuing macro controls, the one in the 1984-1986 period was given up halfway and that in the 1989-1990 period caused a hard landing. The macro control drive in the 1993-1996 period ended up with a relatively serious deflation, because no timely turnaround was achieved for then tight monetary policy.

    Early this year, Premier Wen Jiabao said 2008 would probably be the most difficult year for the Chinese economy. Given so many uncertainties, it would be hard for the central government to make decisions, he noted.

    This week, the financial and economic committee of China's top legislature decided to adhere to the tight monetary policy and prudent fiscal policy, with efforts focusing on avoiding major economic ups and downs. They agreed the current economic situation was good, putting taming inflation high on the development agenda.     

    Some experts warned that post-disaster reconstruction, if out of control, would also possibly re-ignite overheating.

    Ba Shusong, deputy head of the research institute of finance under Development Research Center of State Council, said given the combination of various pressures at home and abroad, it was unsuitable to loosen the tight monetary policy for the time being. It was necessary for the fiscal policy to function more actively to ensure appropriate economic growth.

    Wang Tongsan, economist with the Chinese Academy of Social Sciences, said that price control would still remain an important part of China's economic policy, and that measures must be taken against the potential of inflation.

    Some suggested the export tax rebate policy should be readjusted to bail out the struggling manufacturers, those in the textile sector in particular.

Souce: Xinhua