Date: June 2012: China Inflation at 3% as Growth Slows - Businessweek

China’s consumer prices rose the least in two years in May and industrial output and retail sales trailed estimates, adding pressure for more loosening after this week’s interest-rate cut.

Inflation slowed to 3 percent from a year earlier, the National Bureau of Statistics said today, compared with the 3.2 percent median forecast in a Bloomberg News survey. Production increased 9.6 percent, lower than a projected 9.8 percent gain, and retail sales increased 13.8 percent, the Beijing-based bureau said in separate statements.

Today’s data adds to concerns that global growth is stalling as Greece teeters on the edge of exiting the euro, Spain prepares a request for a bank bailout and U.S. job growth weakens. Premier Wen Jiabao may introduce additional stimulus to protect a full-year growth target of 7.5 percent even as the nation wrestles with bad loan risks from local government debt.

“These data should defeat any remaining complacency that the policy response has been adequate to maintain steady growth,” said Shen Jianguang, chief Asia economist for Mizuho Securities Asia Ltd. in Hong Kong. “More dramatic easing, especially in housing and local government financing vehicles is urgently needed and necessary to avoid a hard landing in the Chinese economy.”

Shen, who previously worked for the European Central Bank, said he expects at least one more reduction in interest rates and three cuts in banks’ reserve requirements this year.

The reserve ratio has dropped by 150 basis points in three cuts since November to spur credit growth and now stands at 20 percent for the biggest banks.

The People’s Bank of China lowered benchmark lending and deposit rates by 25 basis points effective yesterday, taking one-year borrowing costs down to 6.31 percent and one-year savings rates to 3.25 percent. It also allowed banks more leeway to set their own interest rates.

China’s stocks fell yesterday, capping the biggest weekly slide this year, after the central bank’s move intensified concerns the nation’s economic slowdown is deepening. Stocks in Europe declined yesterday after Fitch Ratings cut Spain’s long- term credit rating while the Standard & Poor’s 500 Index rose on speculation central banks around the world will add stimulus to boost growth.

Slowing inflation “is what gave the central bank the confidence to cut interest rates” on June 7, said Liu Li-Gang, head of Greater China economics at Australia & New Zealand Banking Group Ltd. in Hong Kong, who accurately forecast the consumer prices reading. “Given the falling producer prices, China’s inflation outlook remains benign and we expect another cut in banks’ reserve requirements in June to boost slowing economic activities.”

ANZ said in a note yesterday it expects reductions totaling 150 basis points this year while further interest-rate cuts will depend on inflation.

China customs data tomorrow may show exports and imports grew last month by less than the government’s 10 percent target this year. Overseas sales probably increased 7.1 percent from a year earlier while purchases rose 5.5 percent, according to the median estimates in Bloomberg News surveys.

Nations are acting to shore up growth as the global economy suffers its steepest slowdown since the recession ended in 2009.

Australia and Brazil lowered interest rates over the past two weeks while the European Central Bank left the door open at a June 6 press conference for a cut in borrowing costs. Federal Reserve Chairman Ben S. Bernanke told a Congressional committee this week that policy makers will discuss later this month whether to do more to spur growth.

China’s May industrial production growth was below 10 percent for a second straight month, today’s data showed, the first time that’s happened in three years. Power output rose at the second-slowest pace in three years excluding distortions caused by the timing of the Lunar New Year holiday.

Retail sales, which aren’t adjusted for inflation, rose the least in almost six years, except for the January and February holiday months. Growth in sales of home appliances slid to 0.5 percent compared with a 15.4 percent gain in May last year, after the government ended incentive programs.

At the same time, deliveries of passenger vehicles to dealerships by automakers including Toyota Motor Corp. and Honda Motor Co. rose 22.6 percent last month from a year earlier to 1.28 million units, the China Association of Automobile Manufacturers said in Beijing today. The rebound came after sales fell 0.1 percent in May last year as Japanese automakers cut production after Japan’s earthquake.

Fixed-asset investment, excluding rural households and not adjusted for inflation, rose 20.1 percent in the first five months, compared with the median economist estimate for a 20 percent gain. That was the weakest increase for a Jan.-May period since 2001, according to previously released data.

China’s producer-price index fell 1.4 percent in May from a year earlier, the statistics bureau said in a separate statement. That’s the third straight drop and the longest stretch of declines since 2009. The median estimate in a Bloomberg survey was for a 1.1 percent decline.

Inflation in China has eased from a three-year high of 6.5 percent in July 2011, aided by government efforts to cool property prices, boost pork supplies and cut transport costs.

Falling global commodity costs have helped. China yesterday announced a 5.5 percent cut in retail gasoline prices after global crude costs slumped. The move follows a reduction last month that was the first since October.

“China’s producers are seeing sharp deflation, pointing to a worrying lack of final demand,” said Alistair Thornton, a Beijing-based economist with IHS Global Insight. The decline in prices, combined with the “sharp” drop in the prices gauge in May’s purchasing managers’ index “points to considerable sluggishness in domestic manufacturing activity” and should “act as a spur for the government to move more aggressively,” he said.

Anhui Conch Cement Co. (914), the nation’s biggest cement producer, warned this week its first-half profit probably fell more than 50 percent as prices of its products “dropped significantly” due to slower growth in fixed-asset investment.

China’s economy expanded 8.1 percent in the first three months from a year earlier, the fifth quarterly deceleration and the slowest pace in almost three years. Growth may slide to 7 percent to 7.5 percent this quarter, Lu Ting, head of Greater China economics at Bank of America Corp. in Hong Kong, said in a note today.

“We expect the government to start and speed up more projects on the one hand and to make project financing easier” by cutting reserve requirements and interest rates, approving more corporate bond issuance and lifting lending restrictions, he said.

--Zhou Xin. With assistance from Ailing Tan in Singapore, Cynthia Li in Hong Kong, Penny Peng and Chua Baizhen in Beijing. Editors: Nerys Avery, John Liu

To contact Bloomberg news staff on this story: Zhou Xin in Beijing at xzhou68@bloomberg.net

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