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Economists warn of high local govt debt

Updated: 2012-08-09 11:21
( China Daily)

Without waiting for the release of official statistics, investment institutions are releasing estimates about how China's economy fared in July.

In all likelihood, the consumer price index, a measure of inflation in the consumer market, will show a year-on-year increase rate of 1.7 percent in July, the first time such a figure has dipped below 2 percent in two and a half years. If the estimate proves accurate, the rate will also be down from the 2.2 percent year-on-year rate recorded for June.

Among the estimates made by economists surveyed by the business information website Caixin.com, the lowest rate of increase predicted for the July CPI was 1.5 percent.

Meanwhile, the producer price index, a measurement of inflation in production materials, was expected to record a negative 2.5 percent rate of change, indicating that further price declines are likely to be seen in the consumer market in the coming months.

At the same time, Ministry of Commerce data show that food prices, which used to be the main driver of inflation, increased at a mild pace in the last week of July.

Other estimates said China had a trade surplus of $31.6 billion and issued 863 billion yuan ($135.6 billion) in new loans during the month.

While inflation is no longer as great a threat as it was in the early months of the year, economists are divided about how long the current low CPI can last.

Their doubts arose in part after many government agencies decided to embark on aggressive investment plans in an attempt at accelerating the country's economic growth, which has been slowing since the beginning of the year.

Will these projects be tantamount to a Chinese version of quantitative easing?

And will they, in due course, again drive up the prices of production materials and lead to a new round of inflation?

Even worse, will they add to the already heavy debts that are weighing on many provincial and municipal governments?

Economists and business commentators are anxiously discussing these possibilities.

Rather than the central government, which took steps to stimulate the economy in late 2008, local governments are now the entities adopting policies meant to stimulate economic growth - a trend commentators have deemed "4 trillion yuan program 2.0".

That name refers to the stimulus policies Beijing enacted in response to the financial troubles that bedeviled Wall Street in 2008.

Through those, 4 trillion yuan ($635 billion) in new government investments were used to sustain China's economic growth.

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