China should raise its inflation target to as much as 7 percent to make more room for measures to boost economic growth, a top government think tank has said.

The inflation target should be raised to 5 to 7 percent for 2009 and 2010 to maintain stable and rapid economic growth, the State Information Center said in a report published in the China Securities Journal yesterday.

Policymakers aim to limit inflation to 4.8 percent in 2008, and have rolled out an array of austerity measures to cool the economy and curb demand. The consumer price index, the barometer of inflation, thus moderated to 6.3 percent year-on-year in July, down from the peak of 8.8 percent in February.

Meanwhile, the tightening measures such as credit controls and the high interest rate have helped lower China's GDP growth to 10.1 percent in the second quarter, compared with 11.9 percent for the whole of 2007. This slowdown is also a result of a slowing down of the world economy, which has dealt a blow to the nation's export sector.

The think tank had earlier forecast China would notch up a GDP growth of 10.2 percent in the third quarter, roughly the same as that in the second quarter.

"The aim of maintaining stable and fast growth is contradictory to curbing inflation," said the center. "For developing nations under enormous pressure of economic growth, an inflation rate between 4 and 8 percent can be regarded as stable."

Analysts say China's consumer inflation is likely to further moderate over the rest of the year as commodity prices in international markets may continue to decline. The upcoming grain harvest will also help stabilize food prices, which has been the main driver of inflation in China.

"With food prices stabilizing, consolidating global energy costs and slowing economic activities, we expect China's overall CPI to moderate in the second half," said Citigroup economist Ken Peng. "This should provide room for some further policy fine-tuning supporting growth."

"The tightening measures have already been adequate in regard to the current economic environment. There's little need to introduce more austerity measures," the State Information Center said.

According to the think tank, the economy has already moved into a downward track as its GDP growth has been slowing for the past two quarters. Moreover, the prolonged impact of the subprime crisis is likely to further weaken the demand for Chinese exports.

The State Information Center also suggested policymakers prepare for an economic slump as global financial, oil and grain markets are still in turmoil.

"The government could increase expenditures to cushion an abrupt slowdown," said the think tank. "Local governments should prepare a batch of infrastructure projects just in case."

(China Daily August 14, 2008)