China's consumer inflation slows


China's annual consumer inflation slowed sharply to a 20-month low in February, and factory output and retail sales also cooled more than forecast, giving policymakers ample room to further loosen monetary policy to support flagging growth.

Expectations that Beijing will focus on growth rather than inflation were reinforced by data confirming the world's number two economy is losing steam, with the consumer price index easing to 3.2 per cent last month while factory output growth fell back to its lowest since July 2009.

Fixed asset investment also slowed. Easing price pressures will allow the People's Bank of China (PBOC) to continue reducing the level of cash commercial banks must hold as reserves to keep money supply steady in the face of volatile foreign capital inflows, supporting growth without causing an inflationary spike, analysts say.

"The inflation story is over," economists at HSBC said in a note to clients. "This leaves the PBOC with fewer excuses not to step up its easing efforts to support growth - especially given the sharp slowdown in exports so far this year."

Today's flurry of data was the first set of hard numbers of the year for industrial output, fixed asset investment and retail sales, combining data held back from January to iron out heavy distortions caused by the Lunar New Year holidays.

Factory output growth fell to 11.4 per cent, below the consensus forecast of 12.3 per cent, as cooling demand at home and abroad dragged production growth to its weakest since July 2009, when the world was still shuddering from the global financial crisis.

Fixed asset investment, which accounted for 54 per cent of China's economic growth in 2011, grew 21.5 per cent in the first two months, slightly ahead of the 20 per cent forecast.

That was the lowest level since December 2002's 17.4 per cent, but an encouraging sign for policymakers keen to cut dependence on investment spending for growth, which generates both over-capacity and speculative bubbles.

Retail sales grew 14.7 per cent in January-February from a year earlier, short of the 17.5 per cent that analysts' had expected.

The batch of data comes after Beijing sent tremors through global financial markets earlier this week by cutting its 2012 growth forecast to eight-year lows of 7.5 per cent. Although the move was made in part to make space for economic reform, it stirred worries of an abrupt slowdown or a so-called "hard landing".