China Inflation Cools to 4.9% as Export Growth Slows

By Nipa Piboontanasawat and Li Yanping

Sept. 10 (Bloomberg) -- China's inflation weakened to the slowest pace since June 2007 and export growth cooled, stoking speculation the government will cut taxes and ease loan restrictions to spur the world's fourth-largest economy.

Consumer prices rose 4.9 percent in August from a year earlier, less than economists estimated, after gaining 6.3 percent in July, the National Bureau of Statistics said today. Exports rose 21.1 percent in August, down from July's 26.9 percent gain, the Customs Bureau said.

Stocks rose, erasing earlier losses, on expectations China may lower taxes, slow the yuan's gains and ease lending restrictions to protect jobs at exporters after four quarters of slowing economic growth. Cooling inflation also leaves room for the government to counter power shortages by raising energy prices, encouraging refiners and generators to boost output.

``The good news is that the price pressures that have been bothering China over the past 18 months have been decisively subdued,'' said Tao Dong, chief Asia economist at Credit Suisse Group AG in Hong Kong. ``The bad news is that perhaps this reflects the economy has slowed more than the government bargained for.''

The CSI 300 Index of stocks closed 0.2 percent higher on speculation that company profits may benefit from measures to stimulate growth. Officials are working on a plan for as much as 400 billion yuan ($58 billion) of tax cuts and spending to prevent an economic slump, according to economists and reports in domestic news media.

Yuan Rises

The yuan rose to close at 6.8385 against the dollar in Shanghai from 6.8404 immediately before the report was released. The currency has climbed only 0.2 percent against the dollar this quarter after a 6.5 percent advance in the first half. Gains hurt exporters by making their products more expensive.

Inflation across Asia may peak in the fourth quarter and fall ``sharply'' in 2009 as oil prices decline and economic growth slows, Rob Subbaraman, a Hong Kong-based economist at Lehman Brothers Holdings Inc. said last month. Crude oil has fallen 30 percent from a record on July 11.

Consumer prices in Japan rose 2.3 percent in July, the fastest pace in more than a decade, while Malaysia's inflation accelerated to 8.5 percent, the quickest in more than 26 years.

China's producer prices climbed 10.1 percent, the fastest pace since at least 1996, after rising 10 percent in July, today's data showed.

Energy-Price Increases

That may be a peak reflecting past commodity-price increases, said Ha Jiming, a Hong Kong-based chief economist at China International Capital Corp., adding that the government may have ``more room for domestic energy-price adjustments.''

The government has already raised energy prices this year to improve refiners' and generators' margins and ease the nation's sixth year of power shortages.

August's trade surplus climbed to a record $28.7 billion as import growth weakened to 23.1 percent from a year earlier, the slowest pace in almost a year, on falling commodity prices. Foreign direct investment pumped another $7 billion into the financial system last month, the commerce ministry said today.

``Priority will now return to solely focusing on supporting growth,'' said Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong.

Consumer-price inflation has slowed for four months, edging closer to the central bank's target of 4.8 percent for the year. February's 8.7 percent pace was the fastest in 12 years. Food prices rose 10.3 percent in August from a year earlier after gaining 14.4 percent in July. Non-food prices increased 2.1 percent, the same as in July.

Factory Investment

The expansion in factory and property spending, one of the key drivers of the economy, maintained its pace in the eight months through August. Urban fixed-asset investment rose 27.4 percent to 8.49 trillion yuan from a year earlier, the statistics bureau said today. That compared with a 27.3 percent gain for the first seven months.

China's economy expanded 10.1 percent in the second quarter. The pace of growth remains the fastest of the world's 20 biggest economies.

Weaker overseas demand, rising costs and a higher currency have put pressure on exporters of shoes, toys and clothes.

In July, the central bank eased restrictions on how much banks can lend by raising 2008 loan quotas for national banks by 5 percent and regional lenders by 10 percent, according to reports by Goldman Sachs Group Inc., BNP Paribas SA, and China Merchants Bank Co.

Lending Restrictions

The central bank may increase loan quotas by another 5 percent to 10 percent no later than November, according to Sun Mingchun, an economist at Lehman in Hong Kong. The government may cut income tax and, from early 2009, allow tax deductions connected with companies' capital expenditure, he said.

The People's Bank of China has kept interest rates unchanged at a decade high this year. It hasn't increased the reserve ratio for banks -- the proportion of deposits that lenders are required to set aside -- since pushing it to a record 17.5 percent in June.

The record trade surplus may force the central bank to make extra efforts to prevent excess cash in the financial system from stoking inflation. Its main tools for freezing or soaking up money have been bill sales and the bank reserve requirements.

To contact the reporters on this story: Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net; Li Yanping in Beijing at yli16@bloomberg.net