China's economic growth eased more than market expectations in the second quarter, amid rising inflation, slowing exports and a strengthening currency.

GDP expanded by 10.1% in the second quarter – an easing from the 10.6% pace of the first quarter – and below market expectations of a 10.3% increase. Inflation is hovering just under 8% and the A-share market is down 48% this year (although profit forecasts remain strong).

Demand for China's goods is slowing, with export growth easing to 17.7% in Jun-08 (compared with +28.1% in May-08 and 21.9% for the first half). Exports are expected to be under pressure for the remainder of the year, as the US economy weakens and Japan and Europe also slow.

Part of the pain is self-inflicted, as preparations for next month's Olympic Games slow air travel, but China is inevitably impacted by the slowdown in its prime export markets.

An economic slowdown would be further bad news for the Chinese airline sector already struggling under higher fuel prices.

China's big three carriers' shares have all slumped more than 60% this year in Hong Kong trading on concerns that rising fuel prices and slower growth may hit profits. Chinese airlines' combined passenger numbers fell 3.8% last month, with first-half numbers rising 5.4% to 91.8 million.

The CAAC reports the national aviation sector (airports, airlines and related companies) posted a USD542 million profit in the first half of 2008, down 23% year-on-year, despite revenue growth of 15%. The CAAC declined to provide a reason for the fall, or a full-year outlook.

The recent actions of some airlines, including route cuts by China Eastern and China Southern (and the latter's 10% cut in executive salaries) indicates the industry is bracing for rough conditions. Simply hoping that strong traffic growth rates will return after the Olympics (and the associated easing of security/visas) is not a strategy going forward, particularly in a heightened cost environment.