China Inflation Eases From Three-Year High, Giving Room for Pause on Rates

China’s inflation eased in August from a three-year high and industrial output growth moderated, adding to evidence that higher interest rates and lending curbs are cooling the world’s second-biggest economy.

Consumer prices rose 6.2 percent from a year earlier, the National Bureau of Statistics said today, matching the median forecast in a Bloomberg News survey of 31 economists. Industrial output expanded 13.5 percent, the smallest gain in three months.

The figures rounded out a week in Asia in which Australian unemployment unexpectedly climbed, Japanese machinery orders slumped and four central banks held off on raising interest rates. For emerging economies including China, the slowing may help pull down elevated inflation rates that have sparked public protests and eroded households’ purchasing power.

“China is on track for a soft landing and the market could gain more confidence in the resilience of the Chinese economy,” said Lu Ting, a Hong Kong-based economist at Bank of America Merrill Lynch. “Amid jittery global markets and worries about a double-dip in the U.S. and Europe, China’s activity data may offer some support to global raw materials prices.”

Stocks in China outperformed the rest of the region today, with the benchmark Shanghai Composite Index closing little changed at 2,497.75. The MSCI Asia Pacific Index slumped 0.7 percent.

Holding Rates

People’s Bank of China Governor Zhou Xiaochuan may join policy makers across Asia in pausing monetary tightening to support growth as confidence among consumers from Europe to the U.S. threatens the region’s exports. South Korea, Indonesia, Malaysia and the Philippines all held rates unchanged this week.

“It allows Asian central banks to focus a little bit less on restraint and allow those economies to grow a little more rapidly,” Robert Sinche, global head of currency strategy at Royal Bank of Scotland Plc, said in a Bloomberg Television interview in Singapore, referring to prospects for diminished inflation pressures.

Trade data due tomorrow may provide further evidence of a slowdown in China. Import growth in August moderated to 21 percent from a year earlier, according to the median estimate in a Bloomberg survey of 29 economists. Exports may have climbed 21.9 percent, and the trade surplus may have narrowed to $24.6 billion from $31.5 billion the previous month.

Money Market

China’s money-market rate fell to the lowest level in more than three weeks on speculation the PBOC will refrain from announcing more tightening. The seven-day repurchase rate, which measures interbank funding availability, dropped 0.36 percentage point to 3.63 percent as of 3:45 p.m. in Shanghai.

Gross domestic product grew 9.5 percent in the second quarter from a year earlier after climbing 9.7 percent in the first three months. Citigroup economists led by Shen Minggao in Hong Kong estimate growth at 8.9 percent in the third quarter and 8.4 percent in the final three months of 2011.

Premier Wen Jiabao said last week the slowdown is within expectations and that fighting inflation is still the top priority even as he acknowledged increasing risks to the global recovery. Asia’s fastest-growing economy is still likely to expand at five times the pace of the U.S. and euro area this year, according to Citigroup, which estimates full year growth of 9 percent for China.

Governor Zhou has raised rates five times over the past year and boosted banks’ reserve requirements to a record 21.5 percent for the biggest lenders. The central bank is also widening reserve requirements to include lenders’ margin deposits, a move that will be phased in over the next six months.

Housing Curbs

In addition to monetary tightening, Wen imposed curbs on home purchases after prices surged and ordered the construction of more housing for low-income families.

Economists at China International Capital Corp. and Australia & New Zealand Banking Group Ltd. say one more increase in interest rates is possible by the end of this year. Deposit rates have lagged behind inflation for 19 months, eroding households’ purchasing power and encouraging the flow of money out of banks into assets including property. The central bank’s key one-year lending rate stands at 6.56 percent and the deposit rate is 3.5 percent.

The slowdown in August inflation was the first in four months and the sharpest since December, today’s data show.

Food inflation was 13.4 percent, slowing for the first time since April, and accounting for just under two thirds of the overall increase in consumer prices. Pork prices jumped 45.5 percent from a year before, from a 57 percent gain in each of the previous two months, the statistics bureau said.

Six-Year High

Non-food inflation accelerated to 3 percent from 2.9 percent in July to match June’s level, which was the highest in more than six years.

Inflation is “down but not out,” said Alistair Thornton, a Beijing-based economist with IHS Global Insight. “It may have peaked but it will remain elevated for significant period of time and this will complicate monetary policy.”

The slowdown in industrial output was led by heavy industry including steel and cement, statistics bureau data showed.

Fixed-asset investment excluding rural households, which includes roads, factories and real estate, grew 25 percent in the first eight months. Property development spending rose 33.2 percent, supported by low-cost homes. The housing ministry said today that construction started on 8.68 million units through August, meeting 86 percent of the government’s full-year target.

Retail Sales

Retail sales climbed 17 percent in August from a year earlier, after increasing 17.2 percent the previous month, the statistics bureau said. The data, which includes purchases by government entities, isn’t adjusted for inflation.

Factory-gate prices climbed 7.3 percent last month from a year earlier, the statistics bureau said today. That compared with a 7.5 percent jump in July and the 7.2 percent median estimate in a Bloomberg survey.

Cost pressures, including rising wages and raw-material prices, have hurt profits at companies including Baoshan Iron & Steel Co.. The nation’s biggest publicly traded steelmaker reported a 37 percent drop in first-half net income because of higher iron ore costs and weakness in demand from carmakers.

Some companies are passing on higher costs to customers, with liquor producers Wuliangye Yibin Co. and Jiangsu Yanghe Brewery Joint-Stock Co. announcing plans to raise prices by as much as 30 percent.

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

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