China's booming economy is expected to cool in 2008, led by globally falling demand and credit contraction as well as the implementation of macro control policies to curb the inflation of an overheated economy, according to a newly release report from Barclays Capital.

In its recent study of emerging markets, Barclays Capital predicts that China's Domestic Gross Product (GDP) will grow at 8.8% in 2008, dropping from the 12-year record in 2007 of 11.4%.

The study also predicts that macro control policies for curbing inflation will continue until the middle of the year and that after the inflation pressure is alleviated, policymakers will swiftly implement measures to encourage growth. Barclays Capital expects the central bank to reduce deposit and lending rates by 27 basic points in two separate reductions, and the currency, the Yuan, should appreciate by about 7% in 2008.

In recent years, China's export growth has surpassed its import growth, adding surplus to its current account. The central bank has taken a series of measures to curb the excessive liquidity, and the measures are expected to continue. 

The research says that Chinese exporters are facing challenges from decreasing demand based on the economic environment of international and domestic markets. Barclays Capital has adjusted the annual growth rate of China's exports for this year to 10%.

Net export is expected to contribute 1.7 percentage points to the growth of GDP in 2008, lowered from 2.7 percentage points in 2007.

Barclays Capital also forecasts that China's industrial production will grow 12% by the end of 2008, slowing down from 17.4% in 2007.

Consumer confidence is predicted to remain high this year, while resident's salary growth will be slightly slower than 2007. Barclays Capital expects private consumption will increase 6.5% in 2008, however, consumption's contribution to GDP will drop 0.3 percentage points to 2.7 compared to last year.

Barclays Capital foresees that the Chinese government will continue its inflation fighting position during the first half of the year, taking measures including a reserve ratio hike and open market operations. Although appreciation of the Yuan will be used to restrain excessive liquidity, the government will stay cautious. As inflation pressures ease, the government will switch to a support policy for boosting economic growth.