China's inflation falls on lower food cost rise

[November 09, 2011]  BEIJING (AP) -- China's stubbornly high inflation fell in October, giving Beijing room to stimulate the world's No. 2 economy amid weak U.S. and European growth.

Consumer inflation declined to 5.5 percent from September's 6.1 percent as double-digit rises in food costs slowed, government figures showed Wednesday.

Lower inflation gives China's leaders leeway to reverse interest rate hikes and other curbs imposed to cool an economy that grew by 9.1 percent in the latest quarter. Those controls squeezed entrepreneurs and fed fears the economy might slow too abruptly at a time when hopes are pinned on China to prop up global growth.

"Over the past year they had a single target -- control inflation. But now that inflation is fading, they are going to focus on economic growth," said Capital Economics analyst Qinwei Wang.

Inflation is politically dangerous for the ruling communists because it erodes economic gains that underpin their claim to power.

Just as rate hikes and investment curbs have started to gain traction, China faces the dual threats of plunging demand in key U.S. and European export markets and a cooling real estate market, a key driver of growth.

Most analysts expect China to achieve a "soft landing" and avoid an abrupt downturn.

China's expansion in the three months ending in September was down from the previous quarter's 9.5 percent. The International Monetary Fund is forecasting 9.5 percent growth for the full year.

"Inflation is clearly abating," said IMF managing director Christine Lagarde during a visit Wednesday to Beijing. "Monetary tightening can ease off a little bit."

"Fundamentally, China is on the right path," Lagarde said.

Food costs, especially sensitive in a society where poor families spend up to half their incomes to eat, rose 11.9 percent, down from September's 13.4 percent. The price of pork was up 38.6 percent over a year earlier and grain rose 11.6 percent.

Inflation peaked at a 37-month high of 6.5 percent in July, driven by high food prices caused by strong demand and summer flooding that damaged crops. Analysts expect inflation to ease as the autumn harvest comes in, though the government says it will overshoot the official 4 percent target for the year.

In a positive sign for consumers, wholesale inflation fell to 5 percent from September's 6.5 percent, indicating retailers will face less pressure to pass on higher prices.

Entrepreneurs who generate the bulk of China's new jobs and economic activity have been battered by lending curbs and weak export demand. Thousands have been driven into bankruptcy and others have laid off workers, especially in the export-driven southeast, raising the specter of protests.

Export orders from Western buyers at the recently ended Canton Fair, a barometer of future demand, fell 20 to 25 percent compared with the fair's spring session, according to Chinese news reports.

"Weakness in the export sector will be the main hindrance to economic growth in the coming quarters," said Jing Ulrich, JP Morgan's chairwoman for China equities, in a report.

Beijing has promised more bank lending to help small and private companies. But it says credit and investment curbs imposed to cool a real estate boom that has driven up housing costs will stay in place.

The credit clampdown has helped to slow the rise in housing costs but has hurt the real estate and construction industries, which account for about 10 percent of China's economic output. A construction slowdown has cut demand for steel, cement and other raw materials, which will hurt foreign commodity suppliers such as Australia.

"There will not be the slightest wavering in the property-tightening moves. Our target is for prices to return to reasonable levels," Premier Wen Jiabao, the country's top economic official, said last weekend, according to Chinese media.

[Associated Press; By JOE McDONALD]

Associated Press writer Christopher Bodeen contributed.

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