Slower growth dashes hope of swift recovery

China's economy showed extended signs of weakness in July with less-than-expected growth in a batch of key indicators released Thursday, dampening wishes of a modest recovery in the second half.

However, the Consumer Price Index, the main gauge of inflation, expanded at the slowest pace in 30 months of 1.8 percent, allowing more room for policy easing to encourage growth.

The rate, largely in line with market expectation, slowed from June's increase of 2.2 percent and May's 3 percent and was the lowest since February 2010.

Huang Yiping, a Barclays economist, said inflation was likely to be under control in the second half, but whether China could stage an economic rebound was a concern.

The National Bureau of Statistics data also showed industrial production grew 9.2 percent from a year earlier in July, down from the rise of 9.5 percent in June and less than an expected 9.8 percent.

Fixed-asset investment in the first seven months gained 20.4 percent year-on-year, flat with the growth in the first half of this year and defying estimates of a strong rebound after faster approvals of investment projects since June.

Retail sales, a yardstick of domestic consumption, gained 13.1 percent on an annual basis in July, also weaker than the advance of 13.7 percent a month earlier, the statistics bureau said.

"China's real activity indicators all came in worse than expected, suggesting that the economy is still ailing," said Liu Ligang, an economist at Australia & New Zealand Banking Group Ltd. "If the current pace continues, the third-quarter growth could be lower than our projection of 8 percent."

Liu said the central bank should reduce the reserve requirement ratio, the amount of money banks must put aside as reserves, as early as this month to offset capital outflows and spur growth.

However, Liu cautioned about the possibility of an inflation rebound.

"With base effects beginning to diminish, inflation rates will gradually pick up towards the end of the year, albeit at a modest pace," Liu said.

The CPI slowdown in July was led by less growth in food costs, a major factor influencing the inflation reading. They rose 2.4 percent year-on-year last month, compared with a 3.8 percent rise in June.

In the first seven months, China's inflation advanced 3.1 percent, lower than the central government's target of 4 percent.

Meanwhile, the Producer Price Index, the factory-gate measure of inflation and a harbinger of future consumer prices, lost 2.9 percent on an annual basis in July, extending losses for a fifth month and down from June's 2.1 percent fall.

China cut interest rates twice in the past two months after its gross domestic product grew 7.6 percent in the second quarter, its slowest pace in three years.

To stimulate growth, local governments have unveiled many new investment projects, especially in infrastructure construction.