The Chinese economy is at risk of a sharp slowdown in 2008 and may need to accept above-target inflation to keep growth on track, a government researcher said on Tuesday. Yu Bin, the head of macroeconomic research with the Development Research Centre, a think-tank that advises the cabinet, told a forum that China may have to shift its focus away from fighting inflation towards maintaining growth.
"Many have seen the risk of inflation, many have noticed the risk of over-heating, but not many people are seeing the risk of a deep slump in 2008 economic growth," Yu said. Beijing has been battling to contain inflation which in April was 8.5 percent, just below 12-year highs.
But in May it eased to 7.7 percent, two sources told Reuters on Tuesday, and most economists expect it to fall further over the rest of 2008. Yu said it was nearly impossible now to keep the full-year rise in the consumer price index (CPI) within the official target of 4.8 percent, but he said policy makers should be worrying instead about the risk of a sharp economic slowdown.
"Yes, we would be able to keep consumer inflation below 4.8 percent if we could push the growth rate to below 8 percent - but the price will be too high," he told a forum at Tsinghua University. "China has to keep a growth rate about 10 percent to meet the employment goal of creating 10 million jobs this year," he said.
He added that China's exports in the first four months, which rose 21.5 percent from a year earlier in dollar terms, were weakening in volume terms. "Cargo handling in key ports like Ningbo, Qingdao and Dalian is dropping," said Yu.
At home a volatile stock market may make it more difficult for companies to raise capital and a cooling property market could limit business for upstream sectors like steel. Rising raw materials and labour costs could also make investors even more cautious about embarking on new projects.
"In Zhejiang, for instance, salaries for urban employees rose 11 percent in 2007 and may go up by more than 20 percent in 2008," said Yu. Even if companies do want to expand production, possible power shortages and tight fuel supplies may hold them back.