China's low inflation sets the tone for policy easing

Prices were up only marginally from last month, giving Beijing room to further loosen the reins but rising home prices are a worry

PUBLISHED : Tuesday, 16 October, 2012, 12:00am
UPDATED : Tuesday, 16 October, 2012, 4:03am

China's inflation moderated last month as food price increases decelerated, lifting hopes for policy easing from Beijing.

Concern over a rebound in inflation and property prices may restrict the central bank's motivation to cut interest rates further, though it may still adopt tools to adjust liquidity in the banking system, analysts say.

National Bureau of Statistics data showed yesterday that the consumer price index, a key gauge of inflation, climbed 1.9 per cent in September from a year earlier, slower than the 2 per cent gain in August.

Food inflation climbed 2.5 per cent last month from a year earlier, but rose only 0.2 per cent from August. Non-food prices rose 1.7 per cent on the year and 0.4 per cent on the month, which research institutions said was driven by the government's increases in retail fuel prices as global crude oil prices climbed.

The producer price index, an advanced indicator of prices, dropped 3.6 per cent last month from a year earlier, after falling 3.5 per cent in August.

"We believe inflation is not a threat yet, and expect the current accommodative policy stance to remain in the near term," said Citigroup economists Ding Shuang and Shen Minggao.

They predicted the central bank will keep the money supply growth around 14 per cent through reserve ratio cuts or reverse repurchases.

M2, the broadest gauge of money supply in China, expanded 14.8 per cent after rising 13.5 per cent in August.

However, Ding and Shen said, "the window for interest rate cuts appears closed due to an uptrend of inflation … and the rebound in home prices".

The central bank has relied on reverse repurchases since June as a major tool to boost liquidity. Since late last year, it has lowered banks' reserve requirement ratios three times and cut interest rates twice in June and July.

Its officials have indicated they may not ease credit controls quickly due to concern about inflation and deterioration in banks' asset quality.

Curbing inflation is the central bank's top priority, People's Bank of China deputy governor Yi Gang told an International Monetary Fund meeting in Tokyo.

Yi predicted the full-year CPI probably will stay about 2.7 per cent, below the government's annual inflation target of 4 per cent.

On Friday, another PBOC deputy, Liu Shiyu, said he was "concerned about" a rise in banks' bad loan ratios amid continued economic slowing.

He added that the prospect of economic growth was "full of uncertainties".

A rebound in new home prices on the mainland may be another, if not a bigger, concern.

According to SouFun, new home prices rose for the fourth consecutive month last month.

"The real challenge is spurring economic growth without frothing the property market," said Alistair Thornton, senior China economist at IHS Global Insight.

Exports grew 9.9 per cent last month from a year earlier, a jump from August's 2.7 per cent gain, partly driven by Christmas demand. Imports rose 2.4 per cent.

Mizuho Securities said the "upside surprise" in trade could be a "temporary blip".