Li Yining, one of China's leading economists, said on Friday that China is facing a pressing challenge of preventing inflation turning into stagflation.

He said stagflation, the co-existence of high unemployment and high inflation, might occur if improper measures were taken to fight inflation so as to disrupt market expectations, or the economy failed to survive the global slowdown.

Improper anti-inflation measures may lead to investors shying away, widespread unemployment worries or hard times for small and medium-sized companies, resulting in frustrated consumption, Li told the Second Meeting of the Standing Committee of the 11th National Committee of the Chinese People's Political Conference (CPPCC), the country's political advisory body.

The global slowdown, on the other hand, would affect the domestic production and consumption or employment by cutting exports, and it could also lead to outflows of capital, said Li, a member of the Standing Committee.

The economist said China should continue to take a firm grip on the country's foreign exchange flows, and be alert to problems that might occur in the context of a global slowdown given the huge forex reserves.

He said the government should not over-reach itself in fighting inflation or be misled by the concept that only a low inflation rate would be a complete success in the anti-inflation campaign.

"The inflation rate, if controlled at about 60 percent of the growth rate, would be appropriate, such as keeping the rate at around six percent for a 10-percent growth in economy," he said.

The country's inflation rate hit an 11-year high of 8.7 percent in February, and eased to 7.7 percent in May, still above the government-set goal of three percent for the whole year.

He said the national economy was running on a good course, according to economic data, despite new challenges from home and abroad including the may 12 earthquake.

However, the government needed to take the risks of stagflation into consideration when tuning the macro control policies in the next half, he added.

(Xinhua News Agency July 5, 2008)