China Subdued Inflation Gives Room to Raise Utility Costs

China’s consumer inflation stayed subdued in April while the decline in factory-gate price declines deepened, adding to evidence of softer demand and giving the government room to raise utility fees.

The consumer price index rose 2.4 percent in April, the National Bureau of Statistics said today in Beijing, compared with a median forecast of 2.3 percent in a Bloomberg News survey. The producer price index fell 2.6 percent, after March’s 1.9 percent drop.

Inflation running below the government’s annual goal of 3.5 percent gives new Premier Li Keqiang leeway to loosen resource-fee controls that the World Bank says encourage pollution and limit incentives for new technologies. The producer-price deflation may reflect lower commodity prices and factory overcapacity.

“With inflation remaining benign, they can move faster,” said Zhu Haibin, chief China economist at JPMorgan Chase & Co. in Hong Kong. “Resource price reforms will happen faster than reforms in other areas this year” and may begin with fees for industrial use of electricity, water and gasoline, Zhu said.

China will speed up the process of setting up tiered pricing for utilities, the State Council, or cabinet, said May 6 after a meeting led by Li.

The benchmark Shanghai Composite Index of stocks fell 0.7 percent at the 11:30 a.m. local-time break, set for the first drop in five days, after producer prices declined more than forecast. Wang Weijun, a strategist at Zheshang Securities Co. in Shanghai, said the price fall indicates weaker-than-expected growth.

Interest Rates

“Mild inflationary pressures” increase the likelihood of an interest-rate cut in China “soon,” said Liu Li-Gang, chief Greater China economist at Australia & New Zealand Banking Group Ltd., who formerly worked at the World Bank. Haitong International Securities Group said China may lower banks’ reserve requirements as soon as this month.

JPMorgan’s Zhu said monetary policy will “remain neutral,” while Nomura Holdings Inc. said April’s inflation pickup makes any policy easing unlikely.

The decline in producer prices reflects falling commodity prices as well as excess manufacturing capacity in China, Yao Wei, China economist at Societe Generale SA in Hong Kong, said on Bloomberg Television. Companies are having a “difficult time” raising prices, which will keep affecting profit margins, she said.

“There’s very little inflation pressure right now in the economy,” Yao said. “It shows there’s weak demand and there’s no imported inflation.”

Weaker Indicators

The Bank of Korea unexpectedly lowered its benchmark interest rate by a quarter percentage point today, in part because the “trends of improvement in economic indicators in emerging-market countries such as China have been weaker than initially anticipated,” according to a statement. The rate cut follows moves this month by central banks in Australia, Europe and India.

In a sign of weakness in demand, Baoshan Iron & Steel Co., China’s biggest publicly traded steelmaker, said today it cut hot-rolled steel prices for June delivery by 180 yuan ($29) per metric ton and cold-rolled prices by 150 yuan.

The Shanghai Securities News reported today that a plan to curb overcapacity in the steel, cement and flat glass industries is being compiled and will be submitted to the central government for approval.

Food Prices

Food prices rose 4 percent last month from a year earlier, compared with 2.7 percent the previous month, with fresh-vegetable prices helping drive the pickup in broader inflation from March’s 2.1 percent pace. Transportation and communication costs fell 1.1 percent after March’s 0.3 percent decline, according to the bureau.

Moves to loosen government control over prices have already helped companies including China Petroleum & Chemical Corp., Asia’s biggest refiner, and PetroChina Co., the nation’s biggest oil producer. China Petroleum, or Sinopec, profited from crude processing last quarter for the first time since 2011 while PetroChina narrowed refining losses.

China, the world’s biggest energy user, will increase residential gas prices this year by as much as 20 percent in some cities, according to brokers including Mirae Asset Securities Ltd. and CLSA Ltd.

People’s Bank of China Governor Zhou Xiaochuan said last month that the nation needs to “sacrifice short-term growth” to make reforms in the economy. The central bank is projected to leave its benchmark lending rate unchanged at 6 percent through the end of the year, according to 21 of 29 economists surveyed by Bloomberg News last month.

Trade Data

The inflation numbers followed trade data yesterday from the customs administration, which showed export growth in April unexpectedly accelerated to 14.7 percent. Analysts at Bank of America Corp. and Mizuho Securities Co. said the figures probably were inflated by fake invoicing by companies.

The statistics bureau is scheduled on May 13 to release data on industrial output and retail sales for April and investment for the first four months, while the central bank is set to report on April lending and money-supply expansion by May 15.

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