News & Reports News June-2012 Inflation fall invites easing policies

Inflation fall invites easing policies

CHINA'S economic performance stabilized in May following April's sharp deterioration - although it remained weak and consumer prices grew at the slowest rate in nearly two years, giving more space for easing policies.

Industrial production last month expanded 9.6 percent from a year earlier, up 0.3 percentage point from April's figure, the National Bureau of Statistics said yesterday. Fixed-asset investment increased 20.1 percent to 10.89 trillion yuan (US$1.72 trillion) in the first five months, almost the same as the growth of 20.2 percent in the first four months.

Retail sales gained 13.8 percent to 1.67 trillion yuan in May, slower than the 14.1 percent pace a month ago.

The performance was largely in line with earlier market expectation which pointed to signs of stabilization and pinned hope on a bottoming-out economy in the current quarter.

"Except for retail sales, industrial production and investment's data came out as we had expected," said Helen Qiao, managing director at Morgan Stanley Research. "They confirmed growth is stabilizing after the downside surprise in April."

But disappointing retail sales growth indicated a sizable deterioration in domestic demand, said Zhou Hao, an economist at Australia and New Zealand Banking Group Ltd.

"It showed there is a requirement for the faster implementation of fiscal policy," Zhou said. "With the announced stimulus measures gradually filtering through, we expect growth momentum in real activities to pick up strongly from this month onward."

Another unexpected figure was consumer prices, which rose at the slowest pace in 23 months and brushed off concerns of stubborn inflationary pressure.

The Consumer Price Index, the main gauge of inflation, expanded 3 percent from a year earlier last month. It compared with 3.4 percent growth in April and previous market estimation of 3.2 percent.

Food costs, which make up nearly one third in the basket, increased 6.4 percent in May, compared with 7 percent year-on-year growth in April and contributing the most to the CPI slowdown.

Supporting measures

The Producer Price Index, the factory-gate yardstick of inflation and a harbinger of future consumer prices, dropped 1.4 percent last month, extending the loss stream for a third month and deepening from April's 0.7 percent fall.

"The data confirms that inflation is no longer the top priority," said Li Maoyu, an analyst at Changjiang Securities Co. "The slower growth pace of consumer prices is another reflection of weakening domestic demand and may invite policy-makers to launch more supporting measures."

China's gross domestic product expanded 8.1 percent year on year in the first quarter, the slowest in nearly three years and stoking fears of a hard landing in the world's second-largest economy.

To support growth, China has rolled out a set of stimulus measures, including subsidies for energy-efficient consumption, expansion of private investment in previously state-dominant sectors, faster approval of new investment projects and acceleration of tax reform.

On Thursday, the central bank announced an interest rate cut, the first since December 2008.

But some economists say the government should keep monetary policies from getting too loose which may fan inflation.

Lian Ping, chief economist at the Bank of Communications, said it will still be difficult for China to fulfill its target of controlling inflation at under 4 percent this year.

Last Updated (Sunday, 10 June 2012 08:54)