China's Inflation Slows, Giving Room for Interest-Rate Cuts

By Nipa Piboontanasawat

Nov. 11 (Bloomberg) -- China's inflation cooled to the slowest pace in 17 months, making further interest-rate cuts more likely as the world's fourth-biggest economy loses steam.

Consumer prices rose 4 percent in October from a year earlier, the statistics bureau said today, after gaining 4.6 percent in September. Food rose 8.5 percent, the smallest increase since May 2007.

Inflation has halved from February's 12-year high and the government has switched from efforts to cool the economy to unveiling a 4 trillion yuan ($586 billion) package to prop up growth. The central bank may keep lowering borrowing costs after three reductions in the past two months, People's Bank of China Governor Zhou Xiaochuan said Nov. 9 in Sao Paulo.

``Avoiding a hard-landing of the economy is the priority for policy makers,'' said Chen Xingdong, chief China economist at BNP Paribas SA in Beijing. ``The fiscal stimulus is a big help but there is much room for the central bank to cut interest rates still.''

The CSI 300 Index of stocks rose 0.9 percent as of 1:32 p.m. in Shanghai on speculation that borrowing costs will fall. The yuan traded at 6.8284 against the dollar, from 6.8280 before the announcement.

October's inflation was less than the 4.2 percent median estimate of 18 economists surveyed by Bloomberg News.

After accelerating in 2007 and early 2008, largely because of a pork shortage, inflation has slowed for six straight months on improved food supplies and falling prices for energy and commodities.

Economic Slowdown

China's economy has also cooled, expanding 9 percent in the third quarter, the weakest pace in more than five years.

In the first half of this year, the government pledged a tight monetary policy to prevent overheating after an 11.9 percent expansion in 2007, the fastest growth in 13 years. Now, the official stance is ``relatively loose,'' after the global slowdown and financial crisis eroded export orders and slumping property sales weakened domestic demand.

The nation is ``heading into a period of near-deflation,'' said Tao Dong, the Hong Kong-based chief Asia economist for Credit Suisse Group AG. He forecasts 0.4 percent inflation for China next year, compared with 4.8 percent in 2007 and 6.7 percent in the first 10 months of 2008.

Borrowing Costs

The government announced its stimulus package on Nov. 9.

Besides reducing the key one-year lending rate to 6.66 percent, the central bank has lowered the proportion of deposits banks must set aside as reserves, stalled gains by the yuan against the dollar and eliminated quotas that restrict lending.

Slowing inflation ``also provides China a good opportunity to introduce its long-awaited price reforms for energy, utilities, and key resource sectors,'' said Wang Qian, an economist at JPMorgan Chase & Co. in Hong Kong.

Pork fell 1.2 percent in October from a year earlier, after climbing 2.6 percent in September. Non-food prices rose 1.6 percent, down from the previous month's 2 percent gain.

Producer prices rose 6.6 percent in October, the least in eight months, the National Bureau of Statistics said yesterday.

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