China inflation data eases pressure
Benign inflation in September showed China has scope to ease policy even as evidence mounts that earlier pro-growth measures are gaining traction, reducing the pressure on policymakers to act as a once-a-decade leadership transition approaches.
Signs that lending is finally perking up, the approaching end to the destocking cycle and stable employment could allow policymakers to argue that steps taken earlier this year to support the economy in the face of strong global headwinds have worked.
Subdued consumer prices, meanwhile, leave plenty of space for them to act to spur faster growth in the winter after a new generation of leaders takes over the ruling Communist Party.
China's consumer price inflation eased to 1.9 per cent in September from August's 2.0 per cent, while producer prices dropped 3.6 per cent from a year earlier. Both numbers matched the forecast of economists polled by Reuters.
That followed weekend data that showed export growth had rebounded to nearly twice the rate expected in September alongside broad increases in credit and money supply.
"Alongside the positive turn in September exports, slowly accelerating broad money and credit growth will, we believe, keep Wen's administration from further monetary accommodation," said Tim Condon, head of Asian research for ING in Singapore.
"We reiterate our view that incoming (Premier) Li will have more scope to increase accommodation and that he will use it."
Wen Jiabao is expected to be succeeded as China's top economic policymaker by Li Keqiang after the party's congress in November.
Quarterly data due on Thursday is likely to confirm that China has just completed a seventh successively slower quarter of annual growth.
Inflation has fallen steadily from a three-year peak of 6.5 per cent in July 2011 in response to a series of policy tightening steps and weakening economic activity.
Full-year inflation for 2012 should come in about 2.7 per cent, well below the government's 4 per cent target, with economic growth around 7.8 per cent, Yi Gang, deputy governor of the People's Bank of China, said in a speech at last week's annual meeting of the International Monetary Fund .
September marked the seventh straight month of producer price deflation, reflecting China's cooling growth and weak demand for its exports. The deflation has hurt corporate profits and underpins expectations that consumer inflation will stay tame in the coming months.
The month-on-month drop in producer prices continued to narrow, however, suggesting that the business destocking cycle is coming to an end as the economy stabilises, according to Guotai Junan Securities Chief Macroeconomist Jiang Chao.
Taken together, the current numbers relieve the urgency for further tweaks, at least until the November meeting of the 18th Party Congress, when China's new party leaders will be anointed.
"For now, growth is crab-walking. Those looking for concrete signs of momentum and policy support will have to wait until after the Congress," said Alistair Thornton, senior China economist at IHS Global Insight in Beijing.
Policymakers will keep an eye on the two areas where prices are rising - wages, which pushed up service sector prices in September, and pork, which is down sharply compared with last year's spike but showed a 2.3 per cent rise compared with August.
That helped push September CPI up 0.3 per cent on the month.
But they can relax thanks to global oil and commodity prices, which in general are flat or lower than this time last year as major economies struggle with the continued aftermath of the 2008 global financial crisis, the eurozone debt crisis that followed and a devastating 2011 tsunami in Japan.
"One future positive factor, other than growth stabilization, is that PPI inflation was significantly negative and lower than CPI inflation in the past year thanks to the big fall of raw material prices," said Ting Lu, China economist at Bank of America Merrill Lynch in Hong Kong.
"China as the world's largest commodity importer could benefit from this improving terms of trade and a number of China's corporate sectors could see improved margins."
On a volume basis, China reported healthy commodity imports in September - albeit tame compared with previous years' double-digit rises - indicating the economy is still humming along.
"China's 7.7 per cent growth is still an envious level ... When all the world is doing bad, it's hard to assume that Asia will continue to enjoy double-digit growth," Changyong Rhee, chief economist at the Asian Development Bank, said in a speech in Tokyo.
"As long as China achieves mid-7 per cent growth in the next couple of years, they may not use aggressive fiscal and monetary policies in the way (they did after the Lehman crisis) ... The focus would be more on the quality rather than the quantity of growth."
Still, economists impatient with China's slower rate of growth are calling for still more monetary easing.
China's central bank is widely expected to ease policy further, having cut interest rates twice since June and trimmed banks' required reserves three times since November.
The outright falls in factory gate prices are signs that the world's second-biggest economy is struggling to escape the tug of a global slowdown that has set China on course for its weakest full year of growth since 1999.
"On monetary policy, we can only say that there is a little more room for further policy easing," said Zhou Hao, an economist at ANZ Bank in Shanghai.
"Exports have showed signs of stabilisation, but the economy still needs some policy loosening."
One tool at the new administration's disposal could be a calibrated relaxation of property curbs, already sought by local governments reliant on land sales for revenue. Real estate directly affects about 40 different business sectors in China and credit curbs designed to deter speculation has put an extra brake on the economy.
If the curbs are relaxed the challenge will be to prevent a new price spike that could lead to a new round of over-heated investment.
Yi Gang said signs of resurgence in property prices, which the government has fought for more than two years to rein in, posed a dilemma for policymakers.