In August, China's consumer price index (CPI), a key gauge of inflation, rose 2 percent from a year earlier. Imports and exports only climbed 0.2 percent year on year. Stimulus policies and key economic data indicate that China is less likely to experience a V-shaped reversal like that of 2008, and the economy is slowly moving toward stabilization.

Upward pressure on CPI comes from both cost and demand. A contributing factor to the rising CPI in August is higher vegetable prices, which rose 14.3 percent from July and 23.8 percent from a year earlier. Whether it's because of seasonal factors or reduced supply, the increase had something to do with aggregate demand.

Furthermore, prices of consumer goods went up by 2.1 percent from a year earlier and 0.4 percent from July. Prices for fuel, water and electricity increased by 3 percent from a year earlier and 0.5 percent from July. The surging power consumption in the summer and the increasing industrial energy consumption are driving factors behind the rise and both of them are part of aggregate demand.

An increase in aggregate demand explains CPI's rebound in August. According to the basic rules of economics, when increasing aggregate demand propels up the aggregate price level, the economy will grow.

Purchase managers index (PMI) for some manufacturing sectors, including petroleum processing and coking coal, non-ferrous metal smelting and rolling processing, communications equipment and electronic equipment, and transport equipment, also saw growth in August, adding momentum to the stabilization of economic growth.

Non-manufacturing PMI has sent an inspiring signal. The indexes for most nonmanufacturing sectors in August were above 50 percent. A reading of 50 percent demarcates expansion from contraction. In the long run, the recent rapid growth of non-manufacturing sectors is vital to stabilize the economy.

Behind the slowdown in export growth is the sluggish demand in overseas markets. If the government adopts export tax rebates, the pressure on enterprises to increase profits could slightly ease. As long as there is no mass unemployment in the short term, the downside for export growth will provide an opportunity for the processing industry to innovate.

Stimulus policies will take effect in a gradual way. The stabilization of the economy should coincide with economic restructuring, instead of relying entirely on policy stimulus.

The recently unveiled second round of 1-trillion-yuan ($159-billion) stimulus package is part of a plan to stabilize the economy. Obviously, the government should give equal consideration to stabilizing and sustaining economic growth. The approved projects, once completed, will improve infrastructure in central and western regions, break through the bottleneck for further urbanization, and create a favorable environment for these regions to achieve sustainable development.

These projects are expected to be completed in eight years, which is different from a shortterm stimulus. An annual input of more than 100 billion yuan ($15.87 billion) won't be a heavy burden for the Central Government, local governments and commercial banks. Therefore, it is not necessary for the central bank to add liquidity on a large scale. It is likely it will use open market operations to influence liquidity level.

This is an edited excerpt of an article by Zuo Xiaolei, special advisor to the president of China Galaxy Securities, published in China Securities Journal