BEIJING, July 22 (Xinhua) -- The output and sales of China's machinery industry expanded at slower paces in the first half of the year amid mounting costs and declining orders, the China Machinery Industry Federation (CMIF) said Friday.

During the period, the output of the machinery industry, which accounts for 20 percent of the country's total industries, rose 27.08 percent year-on-year to 7.88 trillion yuan (1.22 billion U.S.dollars), after surging 33.93 percent last year, Cai Weici, a CMIF vice president, said at a press conference.

"The moderate drop in the growth rate, as it is strongly linked to the government macro-control measures, is within expectation," Cai said.

The annual increase of machinery output stood at 28 percent during the country's 11th Five-Year Plan (2006-2010) period, according to CMIF data.

Meanwhile, sales stood at 7.69 trillion yuan in the first half of the year, up 26.73 percent year-on-year in comparison to 34.26 percent registered last year.

Cai attributed the decline in growth mainly to rising costs in interest expense, raw material, financing and labor.

"The interest expense, which increased 38.98 percent year-on-year in the first five months, is an important factor in pushing up the industry's financial costs," Cai said, adding that the figure is 24.9 percentage points higher than that of last year.

The central bank has hiked interest rates three times and the reserve requirement ratio six times this year to contain the inflation rate, which hit 5.4 percent in the first half, well above the government target ceiling of 4 percent.

Cai, who expects the sector's foreign trade to register a deficit in 2011, the first time in seven years, said the rapid imports growth also has had a huge impact on the domestic market.

The industry's trade deficit amounted to 2.59 billion U.S. dollars in the first five months, with imports and exports up 31.45 percent and 27.79 percent to 124.8 billion and 122.2 billion U.S. dollars, respectively.

The surplus in inventory, caused by declining orders, also added pressures to sales, according to Cai.

Orders received by the surveyed machinery enterprises only increased 9.23 percent in value year-on-year in the first five months of this year, compared with over 30 percent in the same period of 2010.

"Despite the rising pressures such as costs, prices of quite a few key products continue to drop caused by weak demand and oversupply. Many machinery companies have started to see declines in profits," Cai said.

In the first five months of the year, the industry's profits rose 22.41 percent to 427.3 billion yuan from a year earlier, down 63.72 percentage points from that in 2010.

Noting that declines in major growth indexes have been eased, Cai remains optimistic for the industry's whole-year performance.

Rebounding from a continuing decline in growth over last five months, both the machinery output and sales in June reached monthly records at 1.56 trillion yuan and 1.52 trillion yuan.

The growth figure of the industry's fixed assets investment is also encouraging. It rose 41.77 percent year-on-year to 1.19 trillion yuan in the first half of the year, after dropping to 30 percent last year.

The value-added output of the machinery industry, taking up 18.74 percent of the country's total industries, rose 16.2 percent year-on-year in the first half of the year, 1.9 percentage points higher than the national industrial average.

Further, out of 119 surveyed products, 102 types, or 86 percent, reported growth in output, while 80 saw double-digit growth rates.

"The machinery industry is expected to continue moderate declines in the second half, but the output and sales are still likely to register double-digit growth," Cai said, expecting the two growth figures plus the import growth rate to all stay around 20 percent.

But Zhang Xiaoyu, also a vice president at CMIF, said that the machinery industry is entering a critical time to upgrade its structure as the country shifts its policies from "ensuring growth" to "industrial restructuring."

"Under the context, the machinery industry should focus on promoting independent innovation and core competence to grapple with increasingly stiff challenges," Zhang said.

He further suggested that sectors such as the auto industry, which recorded sharp declines in output and sales in the first half but saw a 22.41-percent increase in investment during the period, should enhance soft power to build brand names and compete in the overseas market.

The output in the auto industry accounted for around 30 percent of the country's machinery industry, according to Zhang.

"The government should also institute favorable policies to support the research and development of the key component sector, which has inhibited the development of the machinery industry," Zhang said, who insisted market adjustment should play the major role in other sectors such as sales and production.

Founded in 2001, CMIF is the only national organization for the country's machinery industry.