China Inflation Limits Wen’s Scope for Easing

By Bloomberg News - Oct 14, 2011 11:35 AM GMT+0700

China’s inflation exceeded 6 percent for a fourth month, limiting the government’s ability to ease monetary policy as a weakening global recovery threatens growth in the world’s second-largest economy.

Consumer prices increased 6.1 percent in September from a year earlier, led by a jump in food costs, the National Bureau of Statistics said today. That matched the median forecast in a Bloomberg News survey of 22 economists and followed a 6.2 percent gain in August.

Stocks fell in Shanghai as the report dimmed any prospect China will cut interest rates after data yesterday showed exports grew at the slowest pace in seven months. Asian policy makers face a “delicate balancing act” as inflation remains elevated while an escalation of Europe’s sovereign-debt crisis may severely affect the region, the International Monetary Fund said yesterday.

“It is too early to call a victory over inflation,” said Liu Li-Gang, a Hong Kong-based economist with Australia & New Zealand Banking Group Ltd., who previously worked for the World Bank. At the same time, “partial” easing, such as lowering reserve requirements for smaller banks, is possible to aid small and medium-sized businesses, he said.

The Shanghai Composite Index slid 1.1 percent as of the 11:30 a.m. local time break in trading. The yuan was little changed at 6.3815 per dollar in Shanghai. While today’s inflation number underscores pressure on the government to allow gains in the currency to restrain prices, a worsening export outlook may lead officials to limit appreciation.

Pork Prices

Food prices rose 13.4 percent in September from a year earlier, the same pace as in August, as pork costs jumped 44 percent, today’s report showed. Non-food inflation cooled to 2.9 percent from 3 percent.

Producer prices rose 6.5 percent in September from a year earlier, the bureau said. That was less than the 6.9 percent median estimate in a Bloomberg survey of economists and also the smallest gain this year. In August, the increase was 7.3 percent.

Singapore cut its growth forecast today and said it will slow currency gains, easing monetary policy for the first time since 2009. Indonesia reduced interest rates this week, the Philippines has announced stimulus measures, and South Korea’s central bank says “downside risks” have increased.

The IMF said that the current pace of monetary tightening is warranted in Asian nations including China where “overheating pressures remain high.” The People’s Bank of China last raised interest rates in July, lifting the key one- year lending rate to 6.56 percent.

Cooling Economy

Growth in China is already slipping, with analysts forecasting that data next week will show a 9.3 percent expansion in the third quarter, down from 9.5 percent in the previous three months.

In Beijing, officials are monitoring a slowdown in the housing market after increases in interest rates and bank reserve requirements and a campaign to rein in speculation. Home prices fell month-on-month for the first time in a year in September, according Soufun Holdings Ltd., China’s biggest real- estate website owner.

The State Council this week unveiled tax breaks to support small businesses after some manufacturers collapsed in the city of Wenzhou in Zhejiang province.

Inflation reached a three-year high of 6.5 percent in July and may moderate in coming months partly because of so-called base effects. The government’s full-year target is 4 percent.

Yum! Brands Inc., owner of the Taco Bell and KFC restaurant chains, said last week it expects food inflation in the “mid-teens” in China this quarter and plans to increase prices gradually to offset labor and commodity costs.

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net