China’s Case for Stimulus Mounts as Inflation Slows With Property Cooling

China’s inflation cooled in October, home sales fell and industrial output grew at the slowest pace in a year, adding pressure for measures to support growth in the world’s second-biggest economy.

Consumer prices rose 5.5 percent from a year earlier, the least in five months, and industrial production increased 13.2 percent, the statistics bureau said on its website yesterday. Housing transactions slid 25 percent from September, the bureau’s data showed.

“Selective easing is already underway,” said Chang Jian, an economist at Barclays Capital in Hong Kong, citing government support for small businesses and low-cost housing projects. More “aggressive” loosening would depend on further declines in inflation and growth, said Chang, who formerly worked for the Hong Kong Monetary Authority and the World Bank.

Chinese officials aim to tame consumer prices and make housing affordable without triggering an economic slump as Europe’s debt crisis threatens export demand. Fiscal policy may be the “first line of defense” for China if global turmoil worsens, Christine Lagarde, managing director of the International Monetary Fund, said in Beijing yesterday.

The Shanghai Composite Index fell 1.1 percent as of 9:31 a.m. local time, part of a slump in global stocks after Italian bond yields rising to euro-era records fueled concern that the European debt crisis is worsening.

Interest Rates

Most economists expect the government to loosen fiscal or monetary policy without cutting interest rates as inflation stays above a full-year target of 4 percent, a Bloomberg News survey showed this week. HSBC Holdings Plc said yesterday that “targeted easing” may include measures to support smaller businesses and the construction of public housing and infrastructure.

Industrial output growth compared with a 13.8 percent gain in September and economists’ median estimate of 13.4 percent. Passenger-car sales increased at the slowest pace in five months, separate data from the China Association of Automobile Manufacturers showed yesterday.

New residential housing starts dropped 1.3 percent in October from a year earlier, the first decline this year, yesterday’s data showed, according to Zhang Zhiwei, a Hong Kong- based economist with Nomura International (Hong Kong) Ltd.

Exports, Housing

“Downside risks from faltering exports and rising housing inventories are building,” said Li Wei, a Shanghai-based economist at Standard Chartered Bank. “A broader scale easing is likely to start soon with faster new loan growth and higher budgetary spending on existing government-led investment.”

If a slowdown in economic growth accelerates in November and December, banks’ reserve requirements may be cut before the Chinese new year in mid January to boost market sentiment, Li said. A reduction in interest rates is unlikely until inflation falls below 3.5 percent, Li said.

China’s inflation may moderate further as raw-material costs decline, reflecting headwinds to the global recovery from faltering U.S. growth and the prospect of a recession in Europe. Producer prices rose 5 percent in October, less than any of 24 analysts forecast and the smallest increase in a year, yesterday’s data showed.

“This is the third month of CPI easing, so investors are now more assured that the trend will continue for the rest of the year,” said Larry Wan, Beijing-based head of investment at Union Life Asset Management Co., which manages the equivalent of $2.2 billion. “We are now also confident there will be easing by the government. The only disagreement among investors is the magnitude of easing.”

Interest-Rate Swaps

China’s swap market is starting to indicate chances for an interest-rate reduction in the coming year. The cost of fixing borrowing costs for a year fell below the 3.5 percent benchmark savings rate last month and dropped to 3.08 percent yesterday.

Growth in fixed-asset investment excluding rural households in the first 10 months was 24.9 percent, unchanged from the first nine months and in line with the median estimate in a Bloomberg survey. Retail sales rose 17.2 percent from a year earlier, after a 17.7 percent gain the previous month.

Food costs rose 11.9 percent last month from a year earlier after a 13.4 percent increase in September, the statistics bureau said. Non-food inflation eased for a second month to 2.7 percent.

The government has raised subsidies for farmers to increase food supplies, reduced transport charges to limit costs and told some companies to refrain from putting up prices. The National Development and Reform Commission told liquor makers including Kweichow Moutai Co. and Wuliangye Yibin Co. in September to hold off planned price increases of as much as 30 percent.

Borrowing Costs

The People’s Bank of China raised interest rates five times from October 2010 to July and boosted banks’ reserve requirements nine times to a record 21.5 percent for the biggest lenders. Small businesses complain of a credit squeeze, especially in the eastern city of Wenzhou.

Premier Wen Jiabao said last month that economic policies will be “fine tuned” to protect the economy against global turmoil. Policy makers have already announced tax cuts for companies, trial reform of the value-added tax system and increased credit for smaller companies.

The government won’t “waver” in its regulation of the real-estate industry and aims to “lead housing prices back to a reasonable level,” Wen told students during a visit to Russia, the Xinhua news agency reported yesterday.

The housing market is cooling after a two-year government campaign to curb speculation and limit purchases. Poly Real Estate Group Co., China’s second-largest developer by market value, said Nov. 7 its contracted sales fell 39 percent from a year earlier last month. Barclays Capital estimates home prices may decrease by 10 percent to 30 percent in the next year.

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

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