The central government was due to publish July's economic indicators today as this newspaper goes to press.

We expect fixed-asset investments (FAI), retail sales and exports to have maintained healthy growth in July. Industrial production will decelerate slightly largely due to constraints on the supply side.

We also look for CPI to have declined to 6.3 percent year-on-year (YoY) in July, as the month-on-month hike in food prices continues to moderate.

Provincial GDP growth in the first half of 2011 proved that the economy's growth drivers have shifted to China's western regions. Fourteen provinces in China's western and south-central provinces achieved more than 13 percent YoY GDP growth in the first half to June 30. Meanwhile, Zhejiang, Shanghai and Beijing were among the lowest with 9.9 percent, 8.4 percent and 8.0 percent YoY GDP growth respectively.

Thirteen western and central provinces realized more than 30 percent YoY growth in FAI in the first half, reflecting government infrastructure and manufacturing investment and the migration of the country's coastal industries inland.

Industrial production is expected to decelerate slightly. The dip in July's PMI to 50.7 percent was mainly due to a 1.0 percentage point (ppt) fall in production PMI to 52.1 percent. Similarly, the finished goods inventory PMI declined 1.8 ppt to 49.2 percent in July, as manufacturing companies reduced inventories. We estimate that industrial production will slow to 14.9 percent YoY in July (versus 15.1 percent YoY in June) under the combined effect of power shortages and credit tightening.

With inventories in many downstream manufacturing sectors declining to normal levels or below and with power supply due to improve in late-August, we look for an uptick in industrial production in September.

We expect CPI to decline to 6.3 percent YoY with a moderation in food price increases. Based on July's agricultural product price movements, we estimate China's food CPI will slow to 0.7 percent month-on-month in July (versus 0.9 percent in June), resulting in a lower annual CPI figure of 6.3 percent YoY, factoring in a 0.1 percent MoM hike in non-food CPI.

Bank loan additions will fall to 550 billion yuan in July (versus 633 billion yuan in June) and M2 growth will slow to 15.7 percent year-to-date in July, mainly on tight liquidity and increasing issues of bank financing products, which will cause some deposits to convert to off-balance-sheet products.

All these indicate that the Chinese economy is entering a stable policy environment. Although the government recently recommitted to its second-half priority of curbing inflation, we view the prospect of a further rate hike or reserve requirement ratio hike in the near term as unlikely. Instead, we believe the People's Bank of China will continue using public market operations to manage liquidity in the interbank market in August. Leading building materials and machinery players will benefit as a pickup in overall industrial production and construction activities is expected to begin in late August.

Benny Lam is an associate director and economist at CCBI. The opinions expressed here are entirely their own.

(HK Edition 08/09/2011 page2)