Too early to guess price trend

PMI has declined and economic growth is slowing down but CPI could remain high, preventing prices from falling

China's purchasing managers index (PMI), a key gauge of manufacturing activities, fell for a fourth straight month in July to a 29-month low of 50.7 percent and dropped by 0.2 percentage points from June's 50.9 percent. The better-than-expected figure indicates a mild slowdown in economic growth.

Should the consumer price index (CPI), a major gauge of inflation, also slow down in July after surging to a new peak of 6.4 percent in June, the government would take it as a positive sign that this year's macro-control has moved closer to its goal, and the central bank would ease the tight monetary policy in the second half of the year.

The repeated decline in PMI is actually a result of the macro-control efforts. The country's policymakers reached a consensus to slow down economic growth from the second half of 2010 because of the inflating real estate bubble. Only by slowing down the country's economic growth, which grew faster than expected between 2009 and 2010, to a normal pace can a steady economic growth rate be achieved and sustained.

The priority of the macro-control efforts are still aimed at stabilizing commodity prices, that is, at easing the inflation pressure in the second half of this year.

The CPI in July is estimated to be close to that in June. Some institutions have forecast that after having hit a three-year high in June, the CPI will fall gradually, while others say it will retain its rising trend for the rest of the year.

Judging from the figures released by the Ministry of Commerce and the Ministry of Agriculture, prices of farm products and food increased at a slower pace in July compared to June, and the fast-rising pork prices have been contained to a certain degree. Despite this, it remains uncertain whether the government can tame inflation in the second half of the year.

In recent years, the government has tackled inflation mostly through administrative measures. For instance, whenever prices of farm products have gone up, the authorities have curbed them by increasing supplies and accelerating distribution. But that may not always be helpful, because unlike the rise in pork prices, which are triggered by supply-demand imbalance, prices of many farm products and food rise even when the supply and demand are not out of balance. The rising prices of farm products and food are actually the result of the continuous increase in prices of upstream products.

Likewise, housing prices have soared in recent years, and the government aims to curb them by putting up more houses for sale. The problem is that despite the availability of a far larger number of houses since 2003, housing prices have kept rising at a fast pace. The reason: houses are investments as well as consumer products, and the two are different in terms of supply-demand relation, pricing and other aspects.

As investment goods, houses will fall short of demand as long as there are favorable financial conditions, including easy access to loans and positive market expectation. In such a case, increasing the supply of houses will only stimulate speculation and lead to still higher housing prices.

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