China's economy is expected to slow down further later this year, as the ruling Communist Party, which remains laser-focused on quelling popular dissatisfaction with its rule, has put itself in a quandary.

Global material prices have been rising recently on the back of growing hopes for economic recovery from the coronavirus crisis, but it seems that the Chinese government has not allowed the nation's companies to raise their sales prices to prevent public frustration from mounting.

As a result, a large number of smaller domestic firms have teetered toward bankruptcy, as they have been unable to pass higher production costs on to consumers.

Moreover, President Xi Jinping, who has pursued China's economic development with a socialist orientation, has been strengthening measures to curb the monopolistic behavior and disorderly capital expansion of key IT enterprises in the country.

Xi's leadership has apparently become worried that the nation's IT giants will collect massive personal data and tap into them to earn huge profits, which could make it more difficult for the Communist-led government to bolster its grip on citizens.

Some business experts have warned that such moves may weaken international competitiveness and impede innovation of the Chinese high-tech industry that has been rapidly growing, probably taking a serious toll on the world's second-biggest economy down the road.

China has pledged to promote a market economy under its policy of "reform and opening-up," but it has conducted price surveillance at home in accordance with the socialist system, where production and distribution of goods and services are controlled by the government.

Smaller companies in China have been "struggling with cost increases" and large firms have been "frightened by a possible tightening of government regulations," a scholar studying the Chinese economy at a university in Beijing said.

If the situation continues, the country's enterprises "would suffer loses, while losing incentive to boost business investment to innovate their technology," the scholar said, adding a sluggishness in the corporate sector could drag down China's economy ahead.

China's economy expanded 7.9 percent from a year earlier during the April-June period, marking the fifth straight quarter of growth, official data showed Thursday, underscoring that the Asian power has steadily overcome the virus shock.

In the first three months of 2021, the Chinese economy posted its steepest quarterly expansion on record, up 18.3 percent. China was also the only major economy to attain positive growth in 2020.

But the economic outlook is not bright, as spikes in global material prices are likely to erode profits of Chinese companies and to make them more reluctant to beef up investment and output.

In June, China's producer price index, a measure of the prices of goods traded between firms, surged 8.8 percent from the previous year, after soaring at its fastest pace in more than 12 years in May, up 9.0 percent.

The nation's consumer price index, however, rose only 1.1 percent in June and 1.3 percent in May, respectively, suggesting that Chinese manufacturers have not been trying to offset higher costs by jacking up sales prices of their products.

"I do not feel prices of things I often buy at supermarkets or stores are on an upward trend," said Wang Meishan, a 45-year-old Chinese housekeeper living in Beijing.

Toru Nishihama, chief economist at the Dai-ichi Life Research Institute in Tokyo, said the government appears to be putting pressure on Chinese enterprises not to pass their costs through to households, creating a "distortion" of price policy.

In an attempt to ease credit and provide financial support for smaller companies, China's central bank, the People's Bank of China, decided earlier this month to cut the amount of cash that banks must hold as reserves.

The scholar in Beijing said that the Chinese government would not permit firms to push up sales prices of their goods, which could "dampen consumer sentiment and in turn trigger a public backlash against the Communist Party."

"The party must be populist to maintain its rule," he said.

On the 100th anniversary of the founding of the ruling party on July 1, Xi declared China has reached its long-held goal of building a "moderately prosperous society," where all of its 1.4 billion citizens can enjoy comfortable lives.

"President Xi just touted the party's achievements. He cannot take economic steps that would be unpopular among Chinese nationals," the scholar added.

The Chinese government, meanwhile, has been casting a stern eye toward the country's IT giants, including Alibaba Group Holding Ltd., Tencent Holdings Ltd., operator of the messaging and payment app WeChat, and ride-hailing service Didi Chuxing Technology Co.

Daiwa Asset Management said such regulations do not indicate that China has become unwilling to foster state-of-the-art technology as Xi has committed to nurturing innovation in the nation.

Nevertheless, fears are rife that the stagnation of China's IT industry would hamper economic expansion in the near future, given that the government's policymaking is related to escalating tensions with the United States in the technology and security fields.

Underlying tightening control by Chinese authorities over IT enterprises is a "data management strategy," said Takahide Kiuchi, executive economist at the Nomura Research Institute in Tokyo.

Beijing has been wary not to "leak personal data accumulated by Chinese companies to overseas, especially to the United States, and enable firms to store much more data than the government," he added.

In early July, the Global Times, a tabloid of the Communist Party, said the rise of "data sovereignty" versus the U.S. government's vigilance against Chinese enterprises "ought to be a wake-up call for national security awareness to be given priority."

An Asian diplomatic source said, "As long as China and the United States are engaged in a competition, Xi will not let his guard down against movements of IT giants. This might generate an adverse impact on the Chinese overall economy."

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