China’s Inflation Slows More Than Estimated

Consumer inflation in China moderated to an 18-month low and the decline in factory-gate prices persisted, giving the government more scope to loosen policies if a growth slowdown deepens.

The consumer price index rose 1.8 percent from a year earlier in April, the National Bureau of Statistics said today in Beijing. That compares with the median estimate of 2.1 percent in a Bloomberg News survey and a 2.4 percent gain in March. The producer-price index fell 2 percent, the 26th straight decline, after a 2.3 percent drop the previous month.

Today’s data add to signs that domestic demand remains muted, with falling commodity prices exacerbating overcapacity in industries including steel and cement. The lack of inflationary pressure will allow the People’s Bank of China to relax monetary policy to support the economy if Premier Li Keqiang’s full-year goal of about 7.5 percent is threatened.

“There’s room for policy easing,” said Chang Jian, chief China economist with Barclays Plc in Hong Kong. There is “clearly downward pressure on property prices and overall inflation,” and if real estate prices keep falling in the second half, “there will be more room for easing,” including a cut in banks’ reserve-requirement ratio, Chang said.

Chang lowered her 2014 inflation forecast to 2.4 percent from 2.7 percent and the 2015 projection to 3 percent from 3.5 percent.

Pork Prices

Declining prices of vegetables and pork were the main reasons for April’s inflation reading, which is likely to be the lowest in the first half of the year, the statistics bureau said in a statement. “Prices in the future will maintain modest growth,” the agency said.

The benchmark Shanghai Composite Index of stocks fell 0.2 percent at the close, while the CSI 300 Index sub-gauge of industrial shares was down 0.3 percent.

Premier Li, in a speech yesterday in Nigeria, reiterated that China has the confidence and capability to achieve this year’s economic-growth goal and maintain medium- to high-speed growth in the long run. Analysts forecast expansion of 7.3 percent in 2014, which would be the slowest in 24 years, based on the median estimate in a Bloomberg survey in April.

Inflation has remained at least one percentage point below the government’s full-year target of 3.5 percent every month this year. Food prices in April rose 2.3 percent from a year earlier, the NBS said, after a 4.1 percent gain in March. Non-food inflation was 1.6 percent, compared with a 1.5 percent pace the previous month.

Consider Easing

“We believe it is time for the PBOC to contemplate easing monetary policy further,” Liu Li-Gang, chief Greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong, said in a note. The risk of deflation has risen, and cutting banks’ reserve-requirement ratio can help “meaningfully lower the lending rates facing Chinese enterprises,” Liu said.

The drop in the producer-price index compared with the median estimate of economists for a 1.9 percent fall and extends the longest stretch of declines since a 31-month slide that started in 1997.

The figures today mean “policy easing becomes more likely, as risks in property loom and inflation drops,” Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong, said in an e-mailed note. He reiterated his forecast for a cut in banks’ reserve-requirement ratio this quarter.

Coal Producer

China Coal Energy Co. last month reported a drop of about 67 percent in first-quarter net income and warned of a decline in first-half profit due to “prolonged low coal prices.”

While the central bank is probably “quite comfortable” with the level of inflation, today’s figures are unlikely to trigger policy easing or additional stimulus, as the change in non-food inflation is too small, said Steve Wang, chief China economist with Reorient Financial Markets Ltd. in Hong Kong.

“There are concerns on whether Chinese property prices are crashing or whether China growth is falling too quickly -- I think that’s a bit too pessimistic,” Wang said.

The statistics bureau will publish April industrial production and retail sales and January-April fixed-asset investment data next week. A customs administration report yesterday showed China’s exports unexpectedly increased 0.9 percent last month from a year earlier, recovering from a 6.6 percent fall in March, while imports increased 0.8 percent after an 11.3 percent drop the previous month.

Analysts have pared their estimates for gains in consumer prices this year. Inflation will be 2.6 percent, according to the median estimate in a Bloomberg News survey of 51 analysts carried out in April, the same pace as in 2013. The median projection in a March survey was 2.8 percent.

— With assistance by Xin Zhou, and Nerys Avery

(Updates with inflation forecast in fifth paragraph.)
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