China inflation fall eases tightening fears

Mainland inflation slowed last month, giving the central bank room to boost liquidity and hold back from tightening the supply of credit

PUBLISHED : Thursday, 09 January, 2014, 11:57am
UPDATED : Friday, 10 January, 2014, 4:57am

Mainland inflation unexpectedly slowed to 2.5 per cent last month, providing the authorities with more leeway to ease liquidity and liberalise resources and utilities prices.

December's consumer price inflation (CPI), announced by the National Bureau of Statistics yesterday, came below economists' expectation of 2.7 per cent and November's 3 per cent, mainly on the back of falling food prices.

Some economists said weaker inflation is good news as it allays fears that the People's Bank of China might be forced to tighten credit supply, a scenario that was considered likely if CPI hit the official cap of 3.5 per cent.

"Inflation is not a major concern at this stage," Nomura chief economist Zhang Zhiwei said. "Inflation provides more room for policy support when growth slows more sharply, which is what we expect in the second quarter."

The central bank has promised to maintain a "prudent" monetary policy this year and provide reasonable money and credit growth to support the real economy.

Bank of America Merrill Lynch economist Lu Ting pointed out that the central bank has been reluctant to inject liquidity into the money market in the past two months despite higher interest rates driven by the interest rate liberalisation.

On a full-year basis, CPI was up 2.6 per cent, way below the central government's targeted 3.5 per cent.

The December CPI rate came on the back of a higher base effect as the corresponding month in 2012 was the coldest since 2006 and led to soaring food prices and transport costs, according to Mizuho Securities economist Shen Jianguang.

Food inflation, led by vegetable and pork prices, declined to 4.1 per cent last month from 5.9 per cent in December last year.

Hang Seng Bank executive director Andrew Fung Hau-chung said the mainland's CPI would hover between 2.5 to 3 per cent for "some time" and said he did not think it would cause abrupt changes in the interest rate regime.

"The monetary policy will remain neutral but tending towards tight as total yuan funds outstanding for foreign exchange is relatively large and the yuan exchange is getting stronger," he said.

He said higher yuan funds outstanding for foreign exchange indicated more capital inflows, which in turn meant a smaller chance to lower interest rates.

A HSBC research report said modest CPI inflation allowed the central government to carry out its 2014 mission to reform resources and utilities prices.

Some economists warned that consumer price inflation could rebound in January and February, around the time of the Lunar New Year.

Meanwhile, production price deflation showed no sign of abating last month and stood at the same level as in November, minus 1.4 per cent, as overcapacity continued to stalk industry. Economists said the deflationary situation was likely to linger for the rest of this year as it takes time to eliminate excess capacity.