By Bi Xiaoning (China Daily)
Updated: 2008-04-05 07:32

Analysts predict inflation will peak in the next few months before it levels out to a more moderate rate of increase in the second half of the year.

"The inflation rate will start decelerating in the second half of 2008 as the government's macro controls gradually take effect," Everbright Securities Co said in a report. "The continued global slowdown will also depress demand, helping to pull down prices," the report said.

Analysts with China International Capital Corp (CICC) were more optimistic, predicting the CPI will hit its highest point by May before it begins to slow down.

The company also predicts the CPI will be about 6.5 percent this year, up from 4.8 percent in 2007, provided the US dollar doesn't depreciate further and manufacturing product prices remain stable.

These forecasts could help lift investor sentiment. With less inflationary pressure, the government could relax its tight monetary policy, widely seen to have depressed the stock market, analysts said.

Due to low US interest rates, "China has little room to adjust its monetary policy stance, so strict macro policies are not possible along the way", Jing Ulrich, chairman of China Equities at US investment bank JPMorgan, said.

Meanwhile, Orient Securities noted that the Chinese economy's fundamentals remain strong. It predicted GDP growth will reach 10.3 percent this year and said investors should not be too pessimistic about the stock market's prospects.

CICC put the growth rate of 265 companies analyzed at 33.2 percent in the first quarter. Orient Securities expects corporate profits to increase an average 40 percent in 2008 - about 10 percentage points higher than previous forecasts.

Based on these predictions, many analysts are favoring stocks in the agriculture and real estate industries.

"There is no justification for investors to be pessimistic," GF Securities said in a report.