China Inflation Stays Subdued

China’s inflation stayed subdued in January while factory-gate prices extended the longest drop since the 1990s, in a sign of moderating demand in the world’s second-largest economy.

The consumer price index rose 2.5 percent from a year earlier, the National Bureau of Statistics said today in Beijing, the same pace as in December. The producer-price index fell 1.6 percent. China’s economic data are distorted in January and February by the shifting timing of the week-long Lunar New Year holiday, which began on Jan. 31 this year.

Today’s reports may give China’s leaders more room to support economic growth that analysts estimate will be the slowest in 24 years in 2014. The ruling Communist Party is trying to balance reining in a credit boom and extravagant spending by officials with maintaining expansion above Premier Li Keqiang’s 7 percent “bottom line” to sustain employment.

“This moderate inflation actually heightened the downside risks to China’s economy,” Liu Li-Gang, head of Greater China economics at Australia & New Zealand Banking Group Ltd. in Hong Kong, said in a note. “If the Chinese authorities keep the growth target in 2014 unchanged at 7.5 percent, the government will have to roll out stimulus policy before June, which could delay the necessary structural reforms this year.”

The Shanghai Composite Index of stocks rose 0.5 percent at 11:24 a.m. local time, headed for the biggest weekly increase since September after the government extended subsidies for automakers and trade figures topped estimates.

Food Prices

Food prices rose 3.7 percent from a year earlier in January, the least since May, while non-food prices increased 1.9 percent, the most since February 2013, today’s data showed. Pork prices fell on rising supply and less waste while factory-gate prices eased as production slowed as the new year holiday approached, the statistics bureau said.

Estimates from 45 economists for January’s CPI increase ranged from 2 percent to 2.8 percent, with a median of 2.4 percent. The gauge rose 2.6 percent in 2013 and the median estimate of analysts surveyed last month is for a 2014 increase of 3.1 percent. The government may set a 4 percent full-year target, the China Securities Journal said in December.

The CPI partly reflects leaders’ efforts to combat corruption and gift-giving, Chang Jian, Barclays Plc chief China economist in Hong Kong, said in a Bloomberg Television interview. President Xi Jinping started a campaign in late 2012 to limit extravagant spending by and for officials at governments and state-owned companies.

Rising Debt

A report from the People’s Bank of China earlier this month suggested that the central bank is less worried about inflation prospects while remaining “concerned about financial risks associated with rising debt levels,” said Ding Shuang, senior China economist at Citigroup Inc. in Hong Kong. The PBOC may not loosen policy unless the government’s “bottom line” is threatened, Ding said in an e-mail.

In its fourth-quarter monetary policy report, the PBOC said China’s price situation is “basically stable” and dropped comments made in its previous report that the country “can’t be blindly optimistic” about inflation.

Policy makers are trying to deal with risks of rising debt and potential defaults. Non-performing loans at banks in the country rose last quarter to 592.1 billion yuan ($97.7 billion), or 1 percent of total loans, the highest proportion since 2011, data from the China Banking Regulatory Commission showed yesterday.

Coal Curbs

The PPI fell from a year earlier for a 23rd straight month, the longest period since 1997-99. The gauge was projected to fall 1.6 percent, based on the median estimate of 41 economists, with forecasts ranging from a decline of 1.1 percent to 2 percent.

China Coal Energy Co., the nation’s second-biggest coal producer by market value, said last month that 2013 profit may have slumped as much as 65 percent because of falling coal prices and government efforts to reduce reliance on the fuel.

Today’s reports give “mixed messages,” said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong. While the PPI indicates weakness in demand, the increase in non-food consumer prices points to improvement, he said.

China’s export and import growth unexpectedly accelerated in January, data from the customs administration showed Feb. 12. The central bank is due to report lending and money-supply figures for January as soon as today.

“China’s slowdown will continue but is not as steep as feared,” Kowalczyk said.

— With assistance by Rachel Butt, and Xin Zhou

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