By Li Yanping and Nipa Piboontanasawat
Dec. 11 (Bloomberg) -- China’s inflation cooled to the weakest pace in almost two years, giving the central bank room to cut interest-rates and shore up growth in the world’s fourth-largest economy.
Consumer prices rose 2.4 percent in November from a year earlier, the statistics bureau said today, after gaining 4 percent in October. That was less than the 3.3 percent median estimate of 18 economists surveyed by Bloomberg News.
China may add to its most aggressive interest-rate reductions in 11 years after food and commodity prices eased. Policy makers, who 10 months ago were battling inflation at a 12-year high, are trying to prevent a spiral of falling prices, profits and consumption as the global recession pushes the economy into a slump.
“Slowing inflation will give more room for the central bank to lower rates to bolster growth,” said Li Wei, an economist at Standard Chartered Bank Plc in Shanghai. “A worst-case scenario for deflation would see producers cutting prices, suffering lower margins and slashing wages, which would eventually damp consumption.”
The CSI 300 Index of stocks fell 0.6 percent as of 1:07 p.m. in Shanghai on the signs of a deepening economic slowdown. The yuan traded at 6.8540 against the dollar, from 6.8550 before the release of the inflation figure.
China’s exports fell for the first time in seven years in November, imports plunged and producer prices rose by the least in two years, the government said yesterday.
Clothes, Pork
Food prices climbed 5.9 percent last month from a year earlier, the smallest gain in almost two years. Non-food prices increased 0.6 percent, the least in almost four years.
Telecommunications prices tumbled 19 percent, pork fell 9.3 percent and garments declined 2 percent.
Goldman Sachs Group Inc. cut today its forecast for China’s economic growth next year to 6 percent from a previous estimate of 7.5 percent. That compares with the nation’s 11.9 percent expansion last year.
Recessions in the U.S., Europe and Japan are sapping demand for exports as weakness in the property market undermines investment, construction and consumption.
“The only thing we have to fear is fear itself,” Premier Wen Jiabao said at an annual economic planning summit in Beijing yesterday, the state-run China Daily newspaper reported today, citing unidentified people. “China has the ability to overcome difficulties.”
‘Increasing Pressure’
The government warned yesterday evening of “increasing downward pressure on the economy” and pledged to boost spending, cut taxes and do more to create jobs to maintain social stability.
The State Council last month announced a 4 trillion yuan ($584 billion) spending package to sustain growth through 2010. The central bank has cut the one-year lending rate to 5.58 percent from 7.47 percent in September and dropped quotas limiting lending by banks.
The yuan’s biggest decline against the dollar in three years on Dec. 1 prompted speculation that the government may use currency depreciation to aid struggling exporters of toys, textiles and furniture.
A mild bout of deflation next year could help China’s economy “as it would help to ease cost burdens for producers and cheaper products may spur consumption and sustain growth,” said Li, of Standard Chartered. “One shouldn’t be surprised if deflation is seen in one or two months next year.”
‘Good Deflation’
Morgan Stanley forecasts that consumer prices will fall 0.8 percent in 2009. Barclays Capital estimates a 0.5 percent increase “with rising risks of deflationary pressure in the next few months.”
The government will need to prevent “good deflation” where reduced commodity and raw-material costs help manufacturers from becoming “bad deflation” leading to falling margins and job losses, said Wang Qing, chief China economist at Morgan Stanley in Hong Kong.
China’s economy grew 9 percent in the third quarter, which was the least in five years. The World Bank is forecasting a 7.5 percent expansion next year, which would be the slowest pace since 1990.
To contact the reporters on this story: Li Yanping in Beijing at yli16@bloomberg.net; Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net
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