China’s inflation falls, boosts fire-power against economic slowdown

Lower inflation clears the way for the country to cut interest rates and boost spending.

July 9, 2012   by The Canadian Press

BEIJING: China’s inflation fell to a 29-month low in June, giving Beijing more room to fight a deepening economic slowdown.

Consumer prices rose 2.2% over a year earlier, down from May’s 3%, government data showed Monday. Food costs rose 3.8%.

Lower inflation clears the way for Beijing to cut interest rates or boost spending to reverse China’s deepest slump since the 2008 global crisis with less danger of igniting a spike in politically sensitive living costs.

Premier Wen Jiabao warned over the weekend that the world’s second-largest economy still faces “huge pressure” to decelerate. That suggested Beijing might roll out more stimulus measures following two rate cuts since the start of June, a reduction in gasoline prices and higher public works spending.

The slowdown and measures to fight it could have global repercussions if they disrupt Chinese demand for imported oil, iron ore and consumer goods from the US, Europe and other struggling economies.

Lower price pressures “do leave more room for more policy easing” but inflation “will likely soon bottom out and should rebound late in the year,” said Credit Agricole CIB economist Dariusz Kowalczyk in a report.

Beijing is likely to avoid more rate cuts and instead probably will increase the amount of money available for lending by reducing minimum reserve limits for banks, Kowalczyk said. He said he expects more tax cuts and spending on infrastructure and other initiatives.

“We remain confident that these measures will suffice to revive growth,” he said.

June’s headline inflation was the lowest since January 2010’s 1.5%. Prices then spiked much higher, fueled in part by Beijing’s flood of government spending and bank lending in response to the 2008 crisis.

Beijing tightened controls repeatedly last year to cool an overheated economy and surging prices but reversed course after global demand plunged and growth slowed abruptly, raising the threat of job losses and unrest.

The slowdown comes at a politically awkward time for the ruling Communist Party, which is trying to enforce calm ahead of a planned handover of power to a younger generation of leaders.

In his weekend comments, Wen promised to “fine-tune economic policies,” according to the official Xinhua News Agency, but no details or new initiatives were announced.

The government is trying to boost growth without allowing the flood of money to cause a repeat of the stock and real estate speculation that followed its 2008 stimulus and pushed up housing costs.

Wen ordered local officials on Saturday to enforce rules aimed at cooling housing prices and called for people who tried to evade curbs on purchases and mortgage lending to be punished, Xinhua reported. He said regulation of the housing market is still at a “critical moment.”

Despite the decline in June headline inflation, prices of vegetables and pork, the country’s staple meat, rose by 12.1% band 12.2% respectively. That highlighted the pressure on Beijing to ensure adequate supplies in a society where the poorest families spend up to half their incomes on food.

©The Canadian Press

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