Economy Improves Across the Board

Chinas inflation remained subdued in July， with the Consumer Price Index （CPI） rising 2.7 percent year on year， the same as in June （see Chart 1）. The latest inflation figure gives authorities some leeway to stimulate the economy with interest rate cuts or increased government spending. Meanwhile， the Producer Price Index （PPI） fell 2.3 percent， narrowing from a fall of 2.7 percent in June （see Chart 2）. Factory-gate prices suggest that demand might be strengthening after a slump that has caused producer prices to decline steadily for more than a year. While consumer inflation is not expected to be an issue this year， producer-price figures are a reflection of the severe overcapacity in many industries， necessitating further policy changes.

restructuring the economy

The Politburo， Chinas top decision-making body， has pledged stable economic growth in the second half of this year as it presses ahead with reforms and restructuring. Chinas leaders are working to turn the economy into one led by domestic consumption and demand from a focus on manufacturing and exports， but those changes raise the possibility of job losses as traditional industries restructure. Companies in industries including steel， cement and glass have been ordered by the authorities to shut down some factories to reduce excess production capacity. Chinas leaders will continue to focus on reforms aimed at supporting entrepreneurs and encouraging domestic consumption to reduce Chinas reliance on exports and investment.

Manufacturing strengthens

Chinas official Purchasing Managers Index （PMI） for the manufacturing sector rose to 50.3 in July， up from 50.1 in June（see Chart 3）. A PMI reading above 50 indicates an expansion in manufacturing activity from the previous month， whereas a reading below 50 indicates contraction. Chinas official PMI suggests services are growing faster than manufacturing. The services measure has hovered between 53.9 and 56.7 in the past 12 months， while manufacturing has fluctuated between 49.2 and 50.9.

trade expands

While retail sales growth slowed slightly to 13.2 percent in July， this is higher than the 12.7-percent increase registered in the first half of 2013 （see Chart 4）. Closer analysis reveals retail sales growth in rural areas （15 percent） outpaced that of urban regions（12.9 percent）. A stronger-than-expected rebound in Chinas exports and imports in July offered hope that the economy may be stabilizing after a slowdown that has prompted the government to shore up activity.

Following two straight months of decline， imports jumped 10.9 percent from a year earlier to reach $168.2 billion （see Chart 5）. After suffering its first fall in exports in 17 months in June， Chinas exports rose 5.1percent in July from a year ago to reach $186 billion （see Chart 6）. Exports have been hurt by weak demand in the United States and Europe， with anemic global growth forcing consumers to tighten their spending habits.