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China Inflation Cooling Leaves Room for Wen to Loosen Credit to Aid Growth

China’s inflation is showing signs of easing further, giving Premier Wen Jiabao more room to loosen fiscal and monetary policies as the economy cools and Europe’s sovereign-debt crisis threatens exports.

An index of manufacturers’ input costs fell the most in 17 months in October, China’s logistics federation and the statistics bureau said yesterday. A separate survey by HSBC Holdings Plc and Markit Economics also showed a decline.

China’s central bank has paused in raising interest rates and bank reserve requirements as officials assess the risk that Group of 20 leaders meeting in Cannes, France, this week will fail to contain the crisis. Inflation may moderate to below 5 percent in November and December, compared with a three-year high of 6.5 percent in July, said Zhu Jianfang, the most accurate forecaster of the number in Bloomberg News surveys over the past two years.

“Food and global oil prices have peaked and that means inflation will fall,’ said Zhu, a Beijing-based economist for Citic Securities Co. Ltd. “The decline will leave more room for policy easing such as looser credit to help sustain growth.” October’s inflation rate, due to be reported next week, may be 5.3 percent or 5.4 percent, he said.

‘Slowdown’ Concern

The median forecast of 10 economists in a Bloomberg News survey is for a 5.4 percent increase in consumer prices from a year earlier, compared with a 6.1 percent gain in September. Falling global commodity costs and government policies to stabilize prices have eased inflation pressures, the statistics bureau said in a commentary yesterday.

China’s manufacturing may be on the verge of a “major slowdown” as orders weaken, Daiwa Capital Markets said in a note after yesterday’s data. The threat from Europe’s crisis was highlighted as global equities sank after Greek Prime Minister George Papandreou said a financial rescue plan for his nation would be put to the vote by citizens.

The Shanghai Composite Index reversed a decline of as much as 1.5 percent to close 1.4 percent higher at 2,504.11 on speculation the central bank may ease monetary policy to bolster the economy. Twelve-month non-deliverable yuan forwards traded 0.1 percent higher at 6.3728 per dollar at 4:30 p.m. in Hong Kong, according to data compiled by Bloomberg.

Greece’s referendum has put Europe’s bailout plan in jeopardy and the sovereign debt problem will continue to haunt the global markets,” said Wei Wei, an analyst at West China Securities Co. in Shanghai.

Worst Since 2009

The federation’s purchasing managers’ index dropped to 50.4 in October, the lowest reading since February 2009 and less than any of 16 economists estimated. Goldman Sachs Group Inc. said seasonal distortions may have played a role. A measure of input costs fell to 46.2, the first reading below 50 since March 2009.

HSBC’s manufacturing gauge, which has a different sample than the government’s measure, rose to 51 from 49.9, with purchase-price inflation easing “sharply” to a four-month low, the bank said in a statement.

Premier Wen said last week that economic policies will be “fine tuned” as needed and the industry ministry said it’s studying “stimulative policies” for smaller companies as the global slowdown threatens growth. The logistics federation’s measure of export orders showed a contraction for October.

A trial of value-added tax changes announced by the government marks the “official start” of selective easing to support growth, HSBC’s Hong Kong-based economist Qu Hongbin said on Oct. 27.

Oil, Aluminum

Producer-price inflation has slowed from a near three-year high of 7.5 percent in July, previously-released statistics bureau data show. Costs of iron-ore imports, Brent crude oil and aluminum have tumbled. Some units of Aluminum Corp. of China Ltd., the nation’s biggest producer of the metal, may face cash- flow challenges if prices continue to drop, President Luo Jianchuan said Oct. 24.

“China is likely to practice sector-specific easing, such as easing credit for smaller businesses, or adjusting reserve ratios for individual banks,” said Tim Condon, Singapore-based head of Asia research at ING Groep NV. “The central bank will avoid a broad-based policy easing such as an interest-rate cut so as not to undo the progress it has made in curbing the excesses from the 2008-2009 credit expansion.”

China has kept interest rates on hold since July in the longest pause since increases began in mid-October last year.

Reserve Requirements

Economists at Mizuho Securities Asia Ltd., Australia & New Zealand Banking Group Ltd. and Societe Generale say the central bank may cut reserve requirements for smaller lenders after companies in some cities, such as Wenzhou, complained of a funding squeeze.

Deposit rates have lagged behind inflation for 20 months, with the benchmark one-year savings rate now at 3.5 percent. That’s encouraged savers to shift money out of banks and into property speculation and riskier channels including non-bank lending, where interest rates are as high as 70 percent a year, according to Dong Tao, a Hong Kong-based economist with Credit Suisse AG.

Officials should raise benchmark interest rates to help curb informal lending, Guo Tianyong, a finance professor at the Central University of Finance and Economics in Beijing, said at a conference yesterday.

--Sophie Leung, Li Yanping, Victoria Ruan. With assistance from Fion Li and Richard Frost in Hong Kong and Zhang Shidong in Shanghai. Editors: Nerys Avery, Paul Panckhurst

To contact the reporter on this story: Sophie Leung in Hong Kong at sleung59@bloomberg.net

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

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