China's National Bureau of Statistics recently reported that the country's economy expanded 10.6 percent during the first quarter of 2008 from the same period a year ago.
That's the ninth consecutive quarter during which China's output of goods and services has grown at a double-digit rate.
Unfortunately, inflationary pressures also continued to mount as a result of the country's increasing demand for oil, steel and other commodities used for constructing and operating China's massive infrastructure projects, as well as the rising demand by China's growing middle class for better clothing and food products.
In fact, the average price of a broad basket of raw materials rose 11 percent in China during March compared to the same period a year ago.
Prices of consumer goods rose 8.3 percent. Ferrous metals (steel and iron) prices rose a whopping 15 percent, medicines rose 10.7 percent, and retail food prices rose 23.5 percent.
The prices of both consumer and industrial goods have been rising at an increasing rate during the past two years. My research indicates that China's inflation will gain momentum during the months ahead, as a result of the government's industrial modernization plans.
Those plans, which involve large infrastructure investments, have put an increasing number of the country's 1.3 billion population to work, which in turn has led to a surge in the after-tax income of China's consumers.
For example, the after-tax incomes of China's urban consumers rose 11.5 percent during the first quarter compared to the same period a year ago, while after-tax incomes of the country's rural consumers rose 18.5 percent.
As a result of rising consumer incomes, sales at China's retail chain stores increased by 21.5 percent during March — the fastest pace since 1999.
The economy has tapped the brakes, slightly. Growth in China's total output of goods and services (GDP) slowed to a year-over-year rate of 10.6 percent during the first quarter of this year, from 11.2 percent in the fourth quarter of 2007.
In fact, China's economy has slowed during each of the past three quarters, after hitting 11.9 percent growth during the second quarter of 2006.
Although my research suggests that China's economy will continue to grow at rapid rates for at least the next couple of years, my models also indicate that economic growth will continue to slow over the next couple of quarters.
Growth will slow primarily as a result of the dramatic slowdown in the U.S. economy and the accompanying decline in demand among U.S. consumers for Chinese goods.
However, I expect inflation rates in China and most other regions of the world to remain high since the demand for all types of raw materials continues to outstrip the available supply of those goods.
China's central bank is concerned about rising inflationary pressures.
After the GDP report was released, the country's central bank raised the proportion of deposits that commercial banks must set aside as reserves in an effort to curtail consumer spending and to slow the economy's rate of growth.
China's commercial banks must now hold 16 percent of their total deposits at the country's central bank. Within an hour of the release of China's latest GDP report, Premier Wen Jiabao said that inflation is China's biggest problem.
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