Inflation fall raises hopes for economy

PUBLISHED : Thursday, 10 November, 2011, 12:00am
UPDATED : Thursday, 10 November, 2011, 12:00am


Inflation on the mainland slowed sharply in October, potentially opening the door for policymakers to begin fine-tuning tightening measures begun a year ago. That would help an economy feeling the chill of a global slowdown.

The consumer price index (CPI) rose 5.5 per cent last month from a year earlier, down from 6.1 per cent in September, according to data released by the National Bureau of Statistics yesterday.

Premier Wen Jiabao said prices had fallen 'noticeably' since October, adding fuel to the view that policymakers would edge towards more pro-growth policies as worries over a global slowdown supplant fears of inflation as their main concern.

The CPI has slowed for three straight months after peaking at 6.5 per cent in July - the highest level in more than three years.

'We believe CPI inflation will decline more sharply in the upcoming month, creating more room for policy loosening,' said Jianguang Shen, chief Asian economist with Mizuho Securities.

An easing of credit and fiscal policies should support not only small and medium-sized enterprises, but also public housing and continuing infrastructure projects, said Qu Hongbin, chief economist with HSBC's Asian Economics Research.

Political leaders fear inflation may trigger social unrest, and Wen has said that curbing inflation is the top priority this year. To bring that about, the People's Bank of China has raised the benchmark interest rate three times this year, while increasing the amount of money banks must keep in reserve a total of six times.

Yifan Hu, chief economist at Haitong International, said she believed that CPI would be 5.5 per cent this year, significantly higher than the government's 4 per cent target, and would moderate to 4.5 per cent in 2012.

The Hang Seng Index and share prices on the mainland's stock markets rebounded yesterday after the release of the better data.

There have been growing calls for the central government to relax its tightening policy as Europe's debt crisis dampens demand for Chinese exports and small businesses struggle to get financing.

However, economists are not convinced that significant loosening measures, such as cuts in interest rates or an easing of commercial banks' required reserve ratios, are imminent. Wen said during a visit to Russia this week that efforts to rein in inflation might yet face difficulties during the winter. 'There will be difficulties, as winter months are the peak period for consumer demand but are also the slack season for vegetable production in the country's north,' Wen said.

Qu said that with little risk of a hard landing for China, Beijing was unlikely to engineer a monetary policy U-turn or an across-the-board easing before headline CPI dropped below 4 per cent.

Food prices, which account for one third of the CPI, fell 0.2 per cent in October from September as the cost of vegetables and eggs dropped 3.4 per cent and 3.8 per cent month on month respectively. The October food-price component of the index was still up 11.9 per cent from a year earlier, but down from the 13.4 per cent increase in September. Non-food prices also slowed, rising 2.7 per cent from a year earlier compared with 2.9 per cent in September.

Meanwhile, the producer price index, a gauge of upstream inflation pressures, also slowed sharply. The October PPI was up 5 per cent year on year, significantly down from 6.5 per cent in September.

Other economic data released yesterday also added to the case that the government would ease its monetary policies.

Value-added industrial output rose 13.2 per cent year on year last month, slowing from September's 13.8 per cent year-on-year growth.

Retail sales jumped 17.2 per cent year on year to reach 1.65 trillion yuan (HK$2.02 trillion). Fixed-asset investment rose 24.9 per cent year on year in the first 10 months. And it was in line with the same 24.9 per cent increase recorded in the January-September period.

'China is likely to see a growth slowdown, not meltdown, in the coming months,' Qu said.

A window opens

Consumer price index up 5.5%

Producer price index up 5%

Retail sales up 17.2%

Industrial production up 13.2%

Fixed asset investment up 24.9%

Source: National Bureau of Statistics