07/17/2008, 00.00
CHINA
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Chinese inflation remains high, economic growth slows

Inflation at 7.1% in June, while producer prices increase 8.8%, a more than 10-year record. China faces the dilemma of containing inflation without impairing production too seriously. Meanwhile, the worst energy crisis in years approaches.

Beijing (AsiaNews/Agencies) - Inflation is slowing, but so is economic growth, in a China facing its worst energy crisis since 2004.

Inflation in June was at 7.1%, down from 7.7% in May. But it remains high, in spite of the fact that the government is holding down the prices of food, fuel, and other essential products. Producer prices have grown by 8.8%, following increases for raw materials and energy, to the highest level in more than 10 years, and it is feared that these greater costs will be passed on to the consumer. This could affect economic growth, which in the second quarter of 2008 was at 10.1%, lower than the 10.6% of the previous quarter and the lowest level since 2005, above all in consequence of a slowdown in exports because of lower demand from the United States and other Western countries.

There have been repercussions for the yuan, which dipped against the dollar yesterday. Beijing needs to lead it appreciate even more in order to contain inflation, but an excessive rise could impact exports and even domestic production: Danny Lau, chairman of the Hong Kong Small and Medium Enterprises Association, expects Hong Kong to close or move 20,000 of the 70,000 factories in has in Guangdong. Production of goods for export provides work for at least 45 million Chinese.

Li Xiaochao, spokesman for the national statistics office, observes that in any case inflation "is still at a fairly high level". "If prices stay high for a long period, it's not good for the stable development of the economy and will affect people's lives, especially those with low incomes". The majority of the population spends more than half of its income on food, and the government is afraid that excessive increases could spark public protests, which it wants to avoid during the Olympics. In addition to food and energy, the cost of housing is rising, up by 8.2% in June in the 70 largest cities.

But strict price controls are also affecting production: the fixed price for electricity has forced dozens of small power plants to close in order to avoid operating at a loss, because of the rise in the price of coal, which has doubled in a few months. Coal is used to power about 80% of China's electricity plants. In 2007, about 38% of the carbon came from small mines, many of which are now closed for safety reasons. Now Beijing wants to reopen the ones that are fairly safe, but the local authorities are reluctant because of fear of accidents that would damage their careers. China is facing its worst energy shortage in four years, and about half of the provinces are already rationing electricity, even though the summer heat is not yet at its peak. In June, electricity rates were increased by 5%, but experts estimate that the price is still 30% below where it should be because of the rise in coal prices. (PB)

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