China’s Economy Slows Slightly, but Inflation Remains a Worry

HONG KONG — After months of brisk activity, China’s torrid economy is finally growing a little more slowly.

But data released on Tuesday and Wednesday leaves unclear whether the slowing is enough to bring down inflation — particularly as long as the central bank is pumping tens of billions of renminbi into the economy each week to keep the Chinese currency from rising more quickly against the dollar.

Chinese policy makers now face a delicate balancing act. They must try to divine how much more currency appreciation the country’s highly successful export industry can withstand, before the stronger renminbi makes Chinese goods less competitive on the global market.

Printing fewer renminbi to buy dollars would be the most direct step that China could undertake to fight inflation, Western and Chinese economists say. But policy makers have feared that doing so would let the renminbi rise too quickly and cause layoffs at export factories — even though the latest data shows a surge in exports.

Instead of crimping the money supply, policy makers have resorted to domestic measures, like raising interest rates and forcing commercial banks to park more of their assets at the central bank instead of lending them. But those moves are now starting to slow the domestic economy in China.

Any curb on the domestic economy directly contradicts the government’s long-term goal of shifting from export-led growth to more self-reliant growth with a greater emphasis on domestic consumption.

Even though prices at the consumer and producer levels rose a little less quickly last month than they had in March, the slight slowdown at the consumer price level was less than many economists had expected. Consumer-price inflation edged down to 5.3 percent in April, from 5.4 percent the month before.

Retail sales and construction barreled ahead in April, but not quite as quickly as the month before.

Industrial production slowed last month, but that was partly because factories had expanded so vigorously that they surpassed the electricity supply in some areas. Another factor was that some parts were in short supply from Japan after the natural and nuclear disasters there.

Meanwhile, the purchasing managers index has inched down, although it is still forecasting continued economic growth.

Taken together, the welter of economic data released Tuesday and Wednesday suggests that the Chinese economy is “cooling, but still hot,” said Hongbin Qu, HSBC’s chief economist for greater China.

As a move against inflation, Mr. Qu predicted in a research note, the government could tighten monetary policy further for the domestic economy.

Some economists are starting to ask whether the government might have gone too far in raising interest four times since October. But interest rates on bank deposits remain far below consumer price inflation, while interest rates on corporate loans remain below inflation at the producer level.

Many Chinese business executives say that their sales are still strong, and some are still finding credit readily available.

“Orders are strong from stores within China, and we see the potential for the domestic market ever expanding,” said Stan Hu, the sales manager at the Xigo Electric Group Company, an air-conditioner manufacturer in Nantuo, in southern China’s Guangdong Province. “It is true that banks have tightened their lending to companies, but we have not been affected given our healthy financial situation.”

Others, though, are struggling for loans — particularly smaller businesses, as well as exporters of low-margin products like mass market clothing.

The worried include Colin Cheng, sales manager of Ningbo Yinzhou Gold-Sun Garments Company, which makes T-shirts, skirts and other knitted garments in Ningbo, in east-central China.

“The banks have tightened lending, especially to enterprises such as ours,” he said. “We still have a three-year loan outstanding from the banks. But once it expires, we have already been informed that it is not likely the loan will be rolled over.”

The strongest facet of the Chinese economy these days is also in many ways the least welcome: exports. China’s exports jumped 25.9 percent last month from a year earlier.

That was a contrast to overall industrial production, which rose only 13.4 percent, as companies devoted more factory capacity to filling orders from overseas, rather than focusing on goods for domestic consumption.

China’s trade surplus in April, at $11.43 billion, was nearly three times what economists had expected, as exports surged past their previous record, set in December.

Countries like India, Singapore and Brazil have been dismayed at the extraordinary success of Chinese companies in grabbing business and seizing a large share of the jobs and prosperity created by the world’s gradual recovery from the economic downturn.

A cornerstone of that export success has been the huge intervention in currency markets. The People’s Bank of China issued renminbi to buy an average of $15 billion a week worth of dollars and other currencies during the first quarter, pushing its foreign exchange reserves over $3 trillion for the first time.

The central bank has tried to limit the inflationary effects of this monetary intervention by selling notes to banks at low interest rates, which allows it temporarily to take renminbi back out of circulation.

Forcing banks to park as much as a fifth of their assets with the central bank also reduces the amount of money in the economy, while enabling the central bank to use much of that money to pay for further purchases of dollars.

But this week’s data contained a warning of a possible threat to the central bank’s delicate balancing act: bank lending grew faster than expected, as banks were quick to use cash not tied up at the central bank.

At the same time, Chinese households actually reduced their deposits at banks. That is a sign many families may have concluded that earning an interest rate below the rate of inflation is a bad idea — and that spending on already high-priced real estate, gold and other physical assets may still be a better bet. Even if such spending is likely to add to inflationary pressures.