Interpac Business and Migration Solutions Melbourne Australia

(November 9, 2011)

China's inflation rate fell to a five-month low as gains in food costs moderated, giving policy makers room to support economic growth as the European debt crisis clouds the outlook for exports.

Consumer prices rose 5.5 per cent in October from a year earlier, the National Bureau of Statistics said today. That compared with a median forecast of 5.5 per cent in a Bloomberg News survey of 27 economists and a 6.1 per cent gain in September. Producer prices increased 5 per cent last month.

Moderating inflation may enable Premier Wen Jiabao to loosen fiscal and monetary policies as companies complain of a credit squeeze, the property market cools and a likely recession in the euro area threatens exports. Wen said consumer prices have shown an "obvious decrease" since October, the Xinhua news agency reported last night, citing comments to students in Russia.

"Inflation is likely to fall further, which should give policy makers more room to embark on some sector-specific policy easing," Lu Zhengwei, a Shanghai-based economist with Industrial Bank Co., said before the release. "But inflation is still high which means any immediate aggressive loosening such as an interest rate cut remains unlikely."

The increase in producer prices in October, the smallest gain in a year, compared with the 5.8 per cent median estimate in a Bloomberg survey of economists and a 6.5 per cent gain in September.

Credit Boom

The People's Bank of China raised interest rates five times from October 2010 to July and boosted banks' reserve requirements nine times to a record 21.5 per cent for the biggest lenders to rein in a credit boom that fueled consumer and property prices.

The cost of housing in China has started to decline after a two-year government campaign to curb speculation and limit purchases. Poly Real Estate Group Co., China's second-largest developer by market value, said Nov. 7 its contracted sales fell 39 per cent from a year earlier last month. Barclays Capital estimates home prices may decrease by 10 per cent to 30 per cent in the next year.

"Without a doubt, the Chinese housing market is entering a difficult period," Barclays' Hong Kong-based economists led by Huang Yiping said in a Nov. 8 research note.

The government raised subsidies for farmers to increase food supplies, reduced transport charges to limit costs and told companies to refrain from putting up prices. The National Development and Reform Commission told liquor makers including Kweichow Moutai Co. and Wuliangye Yibin Co. in September to hold off planned price increases of as much as 30 per cent.

Gasoline Prices Cut

Falling costs for commodities such as oil and an improved supply of pork are helping to ease price pressures even as the government is set to miss its full-year inflation target of about 4 per cent.

Gasoline and diesel prices were cut by 3.5 per cent and 3.9 per cent respectively on Oct. 9 for the first time this year after crude oil costs dropped. An index of manufacturers' input prices fell the most in 17 months in October, China's logistics federation and the statistics bureau said on Nov. 1.

The central bank may reduce reserve requirements for smaller lenders to help ease a credit squeeze, according to economists at banks including Mizuho Securities Asia Ltd. and Societe Generale SA.

The move would be part of a "fine tuning" of economic policies pledged by Wen last month to protect the economy against global economic turmoil. The government has already announced tax cuts for companies, trial reform of the value- added tax system and increased credit for smaller companies.