China Inflation Slows by Most Since 2009

China’s inflation slowed by the most in almost three years, giving officials more room to support growth as the property market cools, Europe’s crisis threatens exports and a credit squeeze hits small businesses.

Consumer prices rose 5.5 percent in October from a year earlier, the statistics bureau said on its website today. The 0.6 percentage point decline from September’s rate was the biggest since February 2009. Producer prices rose 5 percent last month, less than any of 24 analysts forecast.

Most economists expect Premier Wen Jiabao’s 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 today that “targeted easing” may include measures to support smaller businesses and the construction of public housing and infrastructure.

“The combination of easing inflationary pressures, a protracted euro debt crisis and a potential property market slump has set the scene for an imminent policy easing,” said Liu Li-Gang, a Hong Kong-based economist with Australia & New Zealand Banking Group Ltd. “The time is right” for a cut in lenders’ reserve requirements, he said.

China’s price gains 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. The increase in producer prices, the smallest gain in a year, compared with the 5.8 percent median estimate in a Bloomberg survey of economists and a 6.5 percent gain in September.

Swaps Decline

The benchmark Shanghai Composite Index was little changed at 10:57 a.m. local time. 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 reached 3.125 percent today.

Five of 13 forecasters in the Bloomberg News survey predicted no change in the one-year deposit rate before the end of 2012, five predicted an increase and three saw a cut.

Food costs rose 11.9 percent last month from a year earlier after a 13.4 percent increase in September, the statistics bureau said. Pork climbed 39 percent after a 44 percent jump.

Food accounted for 3.62 percentage points of the overall increase in consumer prices, the bureau said. Non-food inflation eased for a second month to 2.7 percent.

Credit Boom

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 to rein in a credit boom that fueled consumer and property prices.

The cost of housing in China has started to decline 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.

“Without a doubt, the Chinese housing market is entering a difficult period,” Barclays’ Hong Kong-based economists led by Huang Yiping said in a Nov. 8 research note.

Farmer Subsidies

The government raised subsidies for farmers to increase food supplies, reduced transport charges to limit costs and told 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.

Falling costs for commodities such as oil and an improved supply of pork are helping to ease price pressures even as the government is set to miss its full-year inflation target.

Gasoline and diesel prices were cut by 3.5 percent and 3.9 percent respectively on Oct. 9 for the first time this year after crude oil costs dropped. An index of manufacturers’ input prices fell the most in 17 months in October, China’s logistics federation and the statistics bureau said on Nov. 1.

The central bank may reduce reserve requirements for smaller lenders to help ease a credit squeeze, according to economists at banks including Mizuho Securities Asia Ltd. and Societe Generale SA.

The move would be part of a “fine tuning” of economic policies pledged by Wen last month to protect the economy against global economic turmoil. The government has already announced tax cuts for companies, trial reform of the value- added tax system and increased credit for smaller companies.

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