China's Economic Growth Beats Forecast, But Inflation Still a Concern

China on Wednesday said its economy expanded at a slower but still robust pace in the second quarter, as Beijing battles to bring politically sensitive inflation under control.

Gross domestic product in the world's No. 2 economy grew 9.5% year-over-year in the April-June period, the National Bureau of Statistics said, as policymakers clamped down on bank lending to tame soaring prices.

The figure was higher than the 9.4% growth forecast in a poll of analysts by Dow Jones Newswires, but slower than the 9.7% posted in the first three months of the year and 9.8% in the fourth quarter of 2010.

Analysts said the slowdown highlighted the dilemma facing policymakers after inflation hit a three-year high of 6.4% in June.

"Slower growth and higher inflation has put the central government in a monetary-policy quandary," IHS Global Insight economist Alistair Thornton said -- but he added that so far the economy is on a "soft-landing trajectory."

The central bank has hiked interest rates five times since October, most recently last Wednesday, and increased the amount of money banks must keep in reserve numerous times, making it difficult for companies to access funding.

Some analysts said the higher-than-forecast growth rate could lead policymakers to further tighten monetary policy in the coming months.

'Numerous Instabilities and Uncertainties'

Chinese Premier Wen Jiabao on Tuesday once again pledged that stabilizing prices is still the main priority in the country's economy.

In the first half, the economy expanded 9.6% year-over-year compared with 11.1% in the same period of 2010, the data showed.

The slowdown in growth comes amid concerns China is heading for a hard landing after manufacturing activity almost stalled in June -- which could have a serious impact on countries struggling to recover from the financial crisis.

Credit Suisse economist Tao Dong said in a recent note that "signs are emerging that the economy might be moderating faster than expected"

And on Wednesday NBS spokesman Sheng Laiyun told reporters: "The external and internal environment for China's economic development is still rather complicated with numerous instabilities and uncertainties."

However, he added that the economy maintained "good momentum" in the first half and the risks for a "large slowdown are small."

The data showed second-quarter gross domestic product was up 2.2% from the first quarter, which Royal Bank of Canada senior strategist Brian Jackson said was evidence that "hard-landing concerns are overdone."

"Overall it does highlight that it's been a pretty moderate slowdown since the start of the year, driven by domestic policy measures," Jackson told AFP.

Markets Embraced the Data

Markets around the region reacted positively to the data -- Shanghai closed up 1.48%, Hong Kong rose 1.22%, Seoul climbed 0.94% and Sydney added 0.43%. Tokyo was 0.37% higher.

Other data showed industrial output from China's factories rose 14.3% year-on-year in the first half, while fixed-asset investment, a measure of government spending on infrastructure, rose 25.6%.

Retail sales were up 16.8% year-over-year in the first six months.

Some analysts have been concerned that Beijing, anxious about inflation's potential to trigger social unrest, may have gone too far in tightening monetary policy as it struggles to bring prices under control.

The June inflation rate of 6.4% percent announced at the weekend was much higher than the government's annual target of 4% and was driven by food prices, which soared more than 14%.

At the same time, there are growing fears about massive local government debt burdens after ratings agency Moody's warned that the proportion of sour loans could be much higher than previously forecast -- which analysts say could derail the economy.

Chinese banks opened the credit valves to fund infrastructure projects as they heeded Beijing's call for nationwide efforts to spur economic growth following the global financial.