Bloomberg News

China Inflation Cooling to 4.2% May Presage More Easing: Economy

December 11, 2011

Dec. 9 (Bloomberg) -- China’s inflation reached a 14-month low and industrial production rose less than forecast, bolstering the case for more stimulus measures to shore up growth in the world’s second-largest economy.

Consumer prices rose 4.2 percent from a year earlier, the statistics bureau said on its website. Output gained 12.4 percent, the smallest increase since August 2009 and below a median forecast of 12.6 percent. A separate report showed passenger-car sales rose the least in six months.

Premier Wen Jiabao’s government may telegraph at an annual economic works conference in coming days that growth is now a greater concern than inflation, given risks posed by Europe’s crisis and a domestic property-market slowdown. Investors have been paring back expectations for gains in the yuan as China slows, with 12-month non-deliverable forwards today suggesting a 0.8 percent decline against the dollar.

“Curbing inflation is a good thing, but the reason why inflation is slowing is because the global economy is slowing,” said Koji Toda, chief fund manager at Resona Bank Ltd. in Tokyo, which oversees the equivalent of $68 billion. “If you see that fact, you can’t be so optimistic.”

Yuan forwards fell 0.2 percent to 6.4150 per dollar as of 3:52 p.m. in Hong Kong.

China will maintain a “prudent” monetary policy and a “proactive” fiscal policy next year, the official Xinhua news agency reported today, citing a meeting of the Communist Party’s Politburo chaired by President Hu Jintao ahead of the works conference.

‘Elastic’ Definition

“The word prudent will have a very elastic meaning in 2012,” said Stephen Green, a Hong Kong-based economist with Standard Chartered Plc. While this “likely signals a cautious approach” to further easing in the short term, “the money tap will be loosened, no doubt,” he said.

In December last year, the Politburo said the nation would shift its monetary policy stance to “prudent” from “moderately loose,” with controlling inflation the top priority. At that point, the government had already raised interest rates and reserve requirements, showing how changes in the official labels for policy can lag behind the implementation of shifts.

Australia & New Zealand Banking Group Ltd. said China’s economy is cooling more quickly than expected, with a rebound possible in the second quarter after more easing. Passenger-car sales rose 0.3 percent to 1.34 million units, the China Association of Automobile Manufacturers said.

Retail Sales, Investment

Producer prices gained 2.7 percent, the least in almost two years, the statistics bureau reports showed. Retail sales rose a more-than-estimated 17.3 percent. Fixed-asset investment excluding rural areas climbed 24.5 percent in the first 11 months from a year earlier compared with 24.9 percent in the first 10 months, today’s releases showed.

The MSCI Asia Pacific Index dropped 2.2 percent as of 4:54 p.m. in Tokyo after leaders meeting in Brussels said European nations will channel as much as 200 billion euros ($267 billion) to the International Monetary Fund to tackle the region’s debt crisis.

In South Korea, the central bank may cut its economic growth forecast for next year if Europe’s crisis worsens beyond the first quarter, which currrently seems unlikely, Lee Sang Woo, director-general of its research department, said today. The monetary authority sees a 3.7 percent expansion, down from an estimate of 4.6 percent in July.

Hong Kong, Japan

Hong Kong may have to stand behind banks and deposits should the global economy slump, Nigel Chalk, the International Monetary Fund’s China mission chief, told Bloomberg Television today. An IMF report said that the city needs to be ready to add “significant and immediate” fiscal stimulus.

Japan’s growth rebound in the aftermath of the March earthquake was less than initially estimated, a government report showed today, underscoring the case for the Bank of Japan to add stimulus. Gross domestic product increased an annualized 5.6 percent last quarter, compared with a preliminary figure of 6 percent.

A slowdown in Japan’s growth is “unavoidable” for now, Kiyohiko Nishimura, deputy governor of the central bank, said in Tokyo today.

Also due today is a U.S. trade report that may show the nation’s deficit rose to $44 billion in October from $43.1 billion in September, according to the median forecast in a Bloomberg News survey of analysts.

Food Costs

In China, officials due to meet for the Central Economic Work Conference to set the policy framework for next year may consider further stimulus. The Economic Observer has reported that the meeting will be from Dec. 12 to 14.

Today’s data showed inflation moderating on smaller gains in food prices, which climbed 8.8 percent from a year earlier, less than the 11.9 percent gain in October.

“The policy wind is going to increasingly blow in the direction of easing,” Yao Wei, a Hong Kong-based economist at Societe Generale SA, wrote this week. Officials may decide at the work meeting that “stabilizing growth” will replace “stabilizing prices” as the policy priority, she said.

Nomura Holdings Inc. says China’s central bank may cut interest rates in the first quarter as growth reaches a “trough.” The Shanghai stock index, China’s benchmark, has declined more than 17 percent this year on concern growth will falter, damping company earnings and boosting banks’ bad debts.

Falling Property Prices

The two biggest risks to the economy are a “much-worse” euro-zone debt crisis and falling investment in property because of tightening measures, Lu Ting, a Hong Kong-based economist for Bank of America Merrill Lynch said today.

In November, housing transactions climbed 12 percent from the previous month as prices fell, according to data released by the statistics bureau today.

Nomura estimates economic growth may slow to 7.5 percent in the January-March period, the least since the global financial crisis, from an estimated 8.6 percent this quarter.

Inflation may average about 4 percent in 2012, Zheng Jingping, the statistics bureau’s chief engineer, wrote this week. Consumer-price gains reached a three-year high of 6.5 percent in July and have exceeded the government’s full-year target of 4 percent every month this year.

The People’s Bank of China cut the amount of cash lenders must set aside as reserves for the first time in three years this month, adding cash to the financial system to support growth. An official manufacturing index contracted for the first time since February 2009 as export orders and new orders slumped, adding to evidence that growth is ebbing.

China’s expansion slowed to 9.1 percent in the third quarter, the least in two years, after the government raised interest rates, tightened credit and expanded property-market curbs.

--Li Yanping, with assistance from Ailing Tan in Singapore, Zheng Lifei in Beijing, Sophie Leung and Fion Li in Hong Kong and Eunkyung Seo in Seoul. Editors: Paul Panckhurst, Stephanie Phang

To contact Bloomberg News staff for this story: Li Yanping in Beijing at yli16@bloomberg.net

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


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