China Producer-Price Inflation Slows on Commodities

By Nipa Piboontanasawat

Nov. 10 (Bloomberg) -- Producer-price inflation in China cooled to the slowest pace in eight months on falling energy and commodity costs, making the central bank more likely to keep cutting interest rates.

Factory-gate prices rose 6.6 percent in October from a year earlier, the statistics bureau said today, after gaining 9.1 percent in September. That was less than the 8 percent median estimate of 15 economists surveyed by Bloomberg News.

Easing inflation pressures give the central bank room to keep reducing rates after the government pledged a $590 billion stimulus package to spur the world's fourth-biggest economy. Monetary policy ``doesn't need to be so restrictive,'' central bank Governor Zhou Xiaochuan said in Sao Paulo yesterday.

``Inflation should continue to ease as food and commodity prices will likely remain soft over the coming months,'' said Jing Ulrich, chairwoman of China equities at JPMorgan Chase & Co. in Hong Kong. ``The definite shift in inflation gives the government leeway to take more aggressive monetary and fiscal action to stimulate the economy.''

Consumer prices probably rose 4.2 percent in October from a year earlier, a Bloomberg News survey showed. That would be the slowest pace in more than a year. The figure is due at 10 a.m. tomorrow.

Policy makers seek to prevent an economic slump after growth cooled to 9 percent in the third quarter, the slowest pace since 2003, and as a world recession looms.

Manufacturing, Exports

China cut rates for the first time in six years in September and followed up with two more reductions, leaving the key one-year lending rate at 6.66 percent.

Chinese manufacturing contracted last month by the most on record as export orders fell, according to two purchasing managers' indexes. Construction activity fell in September at the fastest pace since the 1990s, according to Macquarie Securities Ltd.

``Producer-price inflation will continue on a down trend as production costs, especially global energy and commodity prices, cool,'' said Michael Dai, senior economist at Bank of China (Hong Kong) Ltd. ``The central bank has started reversing the direction of monetary policy to boost economic growth and there will be more interest-rate cuts coming.''

Purchasing prices climbed 11 percent in October from a year earlier.

For the first 10 months, producer prices increased 8.2 percent from a year earlier and purchasing prices climbed 12.2 percent, the National Bureau of Statistics said.

To contact the reporter on this story: Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net