Aug. 12 (Bloomberg) -- China's inflation cooled to the slowest pace in 10 months, giving the government more room to restrain the yuan's advance and bolster economic growth.

Consumer prices rose 6.3 percent in July from a year earlier as food costs eased, the statistics bureau said today, after a 7.1 percent gain in June. That was below the 6.5 percent median estimate of 17 economists surveyed by Bloomberg News.

The slowdown may encourage government policies aimed at sustaining growth in the world's fourth-biggest economy rather than fighting inflation. While policy makers have halted the yuan's appreciation and boosted tax rebates to help exporters, data yesterday showing the fastest producer-price inflation in 12 years underscores the risk that consumer prices will rebound.

``The headline number looks good but price pressures in the pipeline mean it's not all good news,'' said Kevin Lai, an economist at Daiwa Institute of Research in Hong Kong. ``Round one is probably over, but it is still too early to claim a gold medal over inflation fighting.''

The yuan weakened 0.1 percent to 6.8626 against the dollar as of 2:56 p.m. in Shanghai. The CSI 300 Index fell 0.6 percent after sliding 5.2 percent yesterday on concern that producer- price gains will erode profits and prompt monetary tightening.

Global Inflation

Inflation is accelerating in the U.K., the U.S., European Union, Japan, Australia, India, Korea and Canada. Singapore's consumer prices are rising at the fastest rate in 26 years and India's inflation has quickened to the fastest pace in more than 13 years.

China's meat prices rose 16 percent in July, the smallest increase in more than a year, reflecting improved pork supplies and a big jump a year earlier. Non-food prices climbed 2.1 percent, the largest gain since Bloomberg data began in 2005.

China may boost spending on infrastructure and provide more export-tax rebates if economic growth keeps slowing, said T. J. Bond, chief Asia-Pacific economist with Merrill Lynch & Co. in Hong Kong. Gross domestic product rose 10.1 percent in the three months through June, the fourth quarter of slower growth.

``The Chinese inflation cycle has peaked,'' said Glenn Maguire, chief Asia-Pacific economist at Societe Generale in Hong Kong. ``We're going to see an extended period of sideways movement in the yuan.''

The yuan rose 4.2 percent in the three months through March and 2.3 percent in the second quarter before stalling in the third. The currency remains Asia's best performer against the dollar this year. Gains make exports more expensive and cut import costs.

`Fiscal Easing'

More export-tax rebates and a lowering of requirements for banks to set aside a record 17.5 percent of deposits as reserves are possible, Societe Generale's Maguire said.

``Fiscal easing is the next step,'' said Ben Simpfendorfer, an economist with Royal Bank of Scotland Plc in Hong Kong. ``You may see increased payments to low-income households.''

Slower inflation also increases the likelihood of China again raising state-controlled energy prices, after increases in July and August that left them below global levels.

The People's Bank of China increased national commercial banks' lending quotas for 2008 by 5 percent last month to aid small and medium-sized businesses and farmers, according to a central bank official and a bond trader briefed by the central bank. Neither would be identified because they weren't authorized to comment.

Textiles, Garments

China raised tax rebates on exports of textiles and garments to 13 percent from 11 percent from Aug. 1 to aid manufacturers also facing rising labor and raw-material costs.

Exporters are concerned that a weakening global economy will erode shipments. Exports have climbed 22.6 percent this year, down from the 25.7 percent pace for all of 2007.

China's trade surplus unexpectedly widened in July to $25.3 billion from a year earlier, adding to inflows of cash from foreign direct investment and investors betting on more gains by the yuan. Excess money in the financial system threatens to stoke inflation.

February's 8.7 percent gain in consumer prices was the biggest in 12 years.

To contact the reporter on this story: Kevin Hamlin in Beijing on khamlin@bloomberg.net;

Last Updated: August 12, 2008 03:01 EDT