The biggest challenge for the government is to contain inflation, which rose to 8.0% in 1Q 2008 from 6.6% in 4Q 2007 as food prices surged. Faced with high inflation and mounting foreign exchange reserves, the government raised the required reserve ratio on 16 April for the third time this year to a record high of 16.0%.

With weakening global demand and a strong RMB, Mainland China's export growth will slow further in the months ahead. Investment demand will also expand more slowly under the government's tightening of monetary policy and weakening external demand. Slower economic and personal income growth will also erode consumers' purchasing power later this year.

Overall, Mainland China's real GDP growth will decelerate to about 10% in 2Q and about 9-10% for the whole of 2008. With global commodity prices remaining high, consumer price inflation will probably rise further to about 6% this year from 4.8% in 2007.