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China June consumer inflation cools, more stimulus expected

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[July 09, 2014]  By Aileen Wang and Koh Gui Qing

BEIJING (Reuters) - China's consumer inflation cooled slightly more than expected in June, pointing to lingering weakness in the economy which could prompt Beijing to launch further stimulus measures to shore up growth.

The consumer price index (CPI) rose 2.3 percent in June from a year earlier, missing the market forecast of 2.4 percent in a Reuters poll and down from 2.5 percent in May, the National Bureau of Statistics said on Wednesday.

The producer price index (PPI) dropped 1.1 percent in its 28th straight month of decline, versus a market consensus for a fall of 1 percent, signalling that demand in the domestic economy remained lukewarm, despite some recent signs of stabilisation.

"The weak inflation data leaves more scope for Beijing to step up use of targeted measures and even opens the opportunity window for blanket easing policy, such as an interest rate cut, to support economic growth," said Wang Jin, an analyst at Guotai Junan Securities in Shanghai.

Most economists believe Beijing will roll out fresh stimulus measures in coming months to ensure 2015 economic growth meets its target of 7.5 percent, but they are divided over whether it will stick to small-scale measures used so far or take more aggressive steps such as interest rate cuts or a nation-wide reduction in the amount of reserves banks must hold.



Policymakers are reluctant to announce a massive stimulus programme like the one adopted during the 2008-09 global financial crisis, which fueled inflationary pressures and left local governments saddled with mountains of debt.

"Subdued inflation means monetary policy will have plenty of room to ease further over the coming months," Julia R Wang, an economist at HSBC said in a note to clients.

"We think the central bank will likely continue to do so in a targeted manner, provided that economic activity continues to show improvement."

Ting Lu, an economist at Bank of America-Merrill Lynch, also expected Beijing to take further action.

"We expect Beijing to continue rolling out a slew of small-scale measures to deliver the around 7.5 percent annual growth target," he said in a note to clients.

The weaker June inflation reading was mainly due to lower pork and vegetable prices.

The CPI fell 0.1 percent in June from May, versus a forecast of no change in monthly prices.

In the first half of this year, average consumer inflation was 2.3 percent, way below the official ceiling of 3.5 percent set by the government at the start of the year.

FURTHER EASING NEEDED

Data for May and more recent factory and service sector activity surveys have suggested that China's economy was steadying after a weak start to the year.

But analysts said easing consumer inflation and persistent factory-gate deflation showed the recovery remained patchy.

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A cooling property market poses an additional risk, and conditions there could determine just how much more may be needed on the stimulus front to stabilise the broader economy.

With inflation clearly not a threat for now, the government and central bank have the scope to loosen policies further to bolster the economy.

"Further monetary policy easing across the board will still be needed to help lift confidence in China's economy," said ANZ economists in a research note to clients.

ANZ believes Beijing will reduce reserve requirement ratios (RRR) for all of the country's banks in the third quarter. So far, it has relaxed the requirement only for banks which are significant lenders to small companies and the farming sector.

Chinese Premier Li Keqiang said earlier this week that economic growth quickened in the second quarter from the previous three months. But he added the economy still faces downward pressure and further modest stimulus measures will be needed to boost activity.

The latest Reuters poll showed China's economy probably steadied in the second quarter, with annual growth holding firm at 7.4 percent, as recent government policy measures kick in.

Beijing has stepped up policy support in recent months to give a lift to economic growth, which dipped to a 18-month low in the first quarter.

Such measures include targeted reserve requirement cuts for some banks, quicker fiscal disbursements and hastening construction of railways and public housing projects.
 


The central bank said on Monday that it would use a mix of various monetary tools to keep overall liquidity at an appropriate level to support the economy.

(Editing by Kim Coghill)

[ 2014 Thomson Reuters. All rights reserved.]

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