OREANDA-NEWS. August 09, 2013. China may see a mild increase in consumer prices in the second half of the year, which could limit the country's policy options as it faces a double task of stabilizing growth and curbing inflation, analysts said.

A report from Beijing-based First Capital Securities showed that July's Consumer Price Index (CPI), a main gauge of inflation, is likely to rise a 2.8 percent year on year, slightly accelerating from the 2.7-percent increase seen in June.

Tang Jianwei, senior analyst with the Bank of Communications, also forecast a CPI growth of around 2.8 percent. He attributed it to rising food prices, as scorching weather in southeast China pushed up the costs of farm produce.

"China now faces both potential inflationary pressures and risks of an economic downturn," Liu Wei, economist and vice president of Peking University, told Economic Information Daily in Monday's edition.

The two aspects, according to Liu, usually induce opposite economic policies, so China has to carefully seek a balanced portfolio of both tightening and relaxing measures. The policy tone of "stabilizing growth" will stay unchanged in the second half, Liu stressed.

The Chinese economy expanded 7.6 percent in the first half, slightly above the 7.5-percent government growth target set for 2013. The CPI grew 2.4 percent over the same period, well below the 3.5-percent full-year target and leaving room for the country's economic rebalancing.

But Yu Yongding, director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, noted that inflation, especially within house-prices, has become an important constraint on the growth of the world's second-largest economy.

"Today, for a given rate of GDP growth, the corresponding inflation rate is substantially higher than it was over the past two decades," said Yu in an article published with Project Syndicate, citing structural changes including sharply rising costs for labor, environment, energy and raw materials.

The high inflation is deemed a higher price to pay in order to achieve a given increase in GDP growth, according to Yu.

Xie Yaxuan, a senior macro economist at China Merchants Securities, also admitted a close relation between the economic trend and the trend in consumer prices. According to Xie, the CPI will rise in the second half, but only mildly.

The country's GDP growth is unlikely to stall, and structural adjustments will remain the heart of macro-economic controls, said Xie. As a result, the growth rate for the third quarter will pick up only slightly from the previous quarter, and so will CPI growth, Xie explained.

Last week, the Political Bureau of the Communist Party of China Central Committee pledged at a meeting to keep the economy growing steadily in the second half of the year, while promising to fine-tune policies when necessary.

So far, the central leadership has demonstrated greater tolerance of the country's economic slowdown, amid their efforts to switch China's growth model into a more sustainable one led by domestic demand.

In his article, Yu Yongding said China is unlikely to pursue growth at the expense of high inflation, sending the country into a growth plateau.

Yu also ruled out the possibility of a fiscal or monetary stimulus as long as the "floor for growth" is not hit.

"The Chinese economic juggernaut needs to slow down somewhat so that the machine can be fixed; only then can it return to the fast lane and accelerate anew," Yu said.