Some domestic experts believe the PPI surge will not be transferred to the CPI. A National Bureau of Statistics (NBS) report by economist Zhang Liqun said the PPI surge "would not be passed on to the CPI any time soon." He also said he believes that speculative international money has manipulated resource-related product prices. (The report is published on the NBS website)

Trade surplus down 9.6 percent

China's trade surplus fell 9.6 percent in the first seven months to $124 billion compared with the same period last year, dragged down by sluggish international demand and rising production costs. Although the overall figure dropped, July's trade surplus showed better-than-expected growth, which was $25.3 billion.

The robust export figure defied pessimism about China's export growth. A report by Merrill Lynch said a bigger problem in the export sector was the squeezed margins that companies were experiencing because of the appreciation of the yuan and their own rising costs.

The EU continued to be China's largest trading partner with two-way trade totaling $243 billion, marking a 28-percent increase from January to July. Exports to the United States, China's second biggest trade partner, grew 9.9 percent to $140.4 billion with a trade surplus of $92 billion in the first seven months. But the surplus growth also declined by 15 percentage points. Japan remained China's third largest trading partner with bilateral trade totaling $155 billion, up 19.2 percent.

FDI up 44.5 percent

Paid-in foreign direct investment (FDI) in China in the first seven months grew 45 percent year on year, but saw a decreasing number of newly established foreign-invested companies but increasing investment value, the Ministry of Commerce said.

From January to July, China approved the establishment of 16,891 overseas-funded enterprises, a decline of 22.15 percent from the same period last year. But paid-in FDI nationwide amounted to $60.724 billion, up 44.5 percent year on year.

Wang Chao, assistant to the Minister of Commerce, said more foreign funds poured into the country's central and western regions. He also said China's direct investment in overseas markets in the first half reached $25.6 billion, double the amount of last year.

Retail sales up 23.3 percent

Consumption, one of the three drivers of China's GDP (foreign trade and investment are the other two), showed robust year-on-year growth in July, reaching 863 billion yuan ($126 billion). The growth rate was 0.3 percentage points higher than the rate from the previous months.

The government had previously issued warnings about the country's excessive dependence on foreign trade and investment and had tried to boost the consumption portion of GDP.

A Merrill Lynch report on China's consumption trends indicates that consumers are changing their purchasing behavior as their incomes rise and relative prices change. The financial service company said it tracked accelerated growth in the sales of cosmetics, up 31.8 percent year on year in July, and jewelry, which grew 43.6 percent in July year on year.

Shrinking Passenger Vehicle Sales

The China Association of Automobile Manufacturers (CAAM) said dealers sold 488,200 passenger vehicles in July, an increase of 6.79 percent year on year, but a 17.02-percent drop from the number sold in June.

The auto market will face grim challenges in the second half of the year, especially with July and August being a low period for vehicle sales, said Dong Yang, Executive Vice Director of CAAM, in an article in China Securities Journal.

Market analysts said the monthly sales drop was the result of many factors. Sales picked up in June following the May 12 earthquake in Sichuan, but then tapered off in July. Oil price hikes on June 20 also drove down July sales.

Franchise dealers who specialize in sales, spare parts, service and surveys (known as the "4S," which is a barometer of the auto industry) have fallen on hard times. Three of Shanghai's auto dealers have closed their doors and one third of the dealers in Beijing are suffering from poor vehicle and service sales. If the downturn continues, it will be difficult for the country's dealers to meet their full-year goal of selling 10 million passenger cars.

Some analysts say the auto industry still has huge potential. Experts at the State Information Center told China Securities Journal that they believe strong household demand would fuel the development of the domestic auto industry and help it sustain a continuous boom for the next 15 or 20 years. Dong Yang also said he was optimistic about the future of the auto industry. With the country's strong macroeconomic growth, the auto industry has massive potential, he said.