China Inflation Cools, Allowing More Growth Measures

By Kevin Hamlin and Nipa Piboontanasawat

Aug. 12 (Bloomberg) -- China's inflation cooled for a third month on slower food-price gains, giving the government more room for measures to boost economic growth.

The consumer price index rose 6.3 percent in July from a year earlier, the statistics bureau said today, after increasing 7.1 percent in June. That was below the 6.5 percent median estimate of 17 economists surveyed by Bloomberg News.

The expansion of the world's fourth-biggest economy has slowed for four quarters, prompting officials to emphasize the importance of rapid growth and drop references to maintaining a tight monetary policy. China has already loosened bank lending quotas, raised tax rebates for some exports and halted the yuan's appreciation against the dollar.

``The deceleration in inflation supports the shift in policy,'' said Sherman Chan, an economist with Moody's Economy.com in Sydney. ``They think inflation is under control so now they can focus on sustaining growth.''

Inflation was the slowest in 10 months.

The yuan weakened 0.1 percent to 6.8648 as of 10:18 a.m. in Shanghai. The currency rose 4.2 percent in the three months through March and 2.3 percent in the second quarter before stalling in the third. Smaller gains help exporters by keeping their products cheaper in overseas markets, while stronger appreciation counters inflation by lowering import costs.

Inflation Peak

``The Chinese inflation cycle has peaked,'' said Glenn Maguire, chief Asia-Pacific economist at Societe Generale in Hong Kong. ``We're going to see an extended period of sideways movement in the yuan.''

Food prices rose 14.4 percent in July from a year earlier after gaining 17.3 percent in June, the statistics bureau said. Non-food prices increased 2.1 percent after climbing 1.9 percent.

China's inflation is falling just as other Asian countries face new highs. Singapore's consumer prices are rising at the fastest rate in 26 years and India's inflation has accelerated to the fastest pace in more than 13 years.

Meat prices rose 16 percent from a year earlier after a 27.3 percent gain in June. Vegetables gained 8.4 percent after an 8.3 percent increase.

China's inflation may ease to 4.5 percent in the fourth quarter as gains in pork prices slow and a stronger yuan cuts import costs, Xu Lianzhong, head of the price analysis and forecast division at the National Development and Reform Commission's Price Monitoring Center, said on August 6.

Concerns are easing that producer-price inflation, which in July accelerated to the fastest pace in 12 years, will stoke a rebound in consumer-price inflation.

Falling Commodity Prices

The Reuters/Jefferies CRB Index of 19 raw materials is down 12 percent over the past month. China's producer prices will peak in the third quarter and then decline as falling commodity prices feed through to factories, said Chan at Moody's.

Slower global and domestic growth also make it difficult for manufacturers to ``pass through any price increases to consumers,'' said Peng Wensheng, head of China research at Barclays Capital in Hong Kong.

China's economy expanded 10.1 percent in the second quarter from a year earlier, the slowest pace since 2005. Growth below 9 percent would be ``unacceptable'' for a government targeting 10 million new jobs a year, according to Credit Suisse Group.

Slower inflation gives the government ample room to stimulate growth, said Ben Simpfendorfer, an economist with Royal Bank of Scotland Plc in Hong Kong. ``Fiscal easing is the next step,'' he said. ``You may see increased payments to low- income households.''

Lending Quotas

President Hu Jintao said Aug. 1 that the country needs to maintain steady and fast growth.

The People's Bank of China increased national commercial banks' lending quotas for 2008 by 5 percent last month to aid small and medium-sized businesses and farmers, according to a central bank official and a bond trader briefed by the central bank. Neither would be identified because they weren't authorized to comment.

China raised tax rebates on exports of textiles and garments to 13 percent from 11 percent from Aug. 1 to aid manufacturers also facing rising labor and raw-material costs.

China's economic growth may slow to below 10 percent by the fourth quarter and more export-tax rebates are then likely, said Societe Generale's Maguire. Easing inflation will allow the central bank to reduce the proportion of reserves banks must hold as deposits, currently at a record 17.5 percent, he said.

``China's ability to fend off a big slowdown should not be underestimated,'' said Ting Lu, an economist with Merrill Lynch & Co. in Hong Kong.

Too much easing too soon could still re-ignite inflation, said Simpfendorfer. ``This is an economy that responds very quickly to any sign of easing,'' he said. ``It wouldn't take much to see a re-acceleration in growth.''

To contact the reporter on this story: Kevin Hamlin in Beijing on khamlin@bloomberg.net;