China’s consumer inflation falls to 4.1% - Financial Times

Chinese inflation edged down in December, setting the stage for a continuation of cautious policy loosening to support the slowing economy. Consumer prices rose 4.1 per cent from a year earlier, the lowest in 15 months and well below July’s peak of 6.5 per cent.

It was the fifth consecutive month of receding inflation. However, China’s consumer price index only edged 0.1 percentage point lower from November, compared with larger 1.3 and 0.6 percentage point drops in the previous two months.
Analysts said that seasonal factors were partly to blame for the more moderate dip in inflation, as Chinese New Year falls earlier in 2012 than in recent years, fuelling a mini-spending splurge in December, which helped push up food prices.
“This continued moderation in prices pressures is a welcome development and will increase the scope for policy to respond should growth start to weaken more sharply in coming months,” said Brian Jackson, an economist with Royal Bank of Canada in Hong Kong.
The Shanghai Composite index ended the day down ever so slightly as investors questioned just how forceful Beijing will be in easing policy. Shares surged 6 per cent earlier this week amid optimism that the government was ready to prop up growth more aggressively.
China’s shift to looser monetary settings has so far been gradual, with officials wary of repeating the massive stimulus that they unleashed when the global financial crisis broke out in late 2008.
Beijing has trimmed the portion of deposits that banks must hold in reserve as a way of releasing more liquidity into the economy. The central bank has also suspended bill sales in open-market operations in the run-up to the Lunar New Year, which is celebrated at the end of January, as another way of ensuring that there is enough cash in the financial system.
Most importantly, the government has used “window guidance” to instruct banks to increase their lending – a policy tool that can be used to great effect in China, where all large banks are owned by the state. That support was evident in a rise in lending in December, which has continued into January, according to local media reports.
Food prices, which account for about one-third of China’s consumer price index, actually picked up a touch last month, rising 9.1 per cent year-on-year in December against 8.8 per cent in November.
But Zhang Zhiwei said that a closer look at the month-on-month inflation trajectory was more reassuring. Overall consumer prices were up 0.3 per cent in December from November, below the historical average of 0.5 per cent for this time of year.
“Consumer price inflation is not the key concern for policymakers for now. Growth is slowing down quickly as imports in December indicated,” he said. “Policy is clearly in an easing cycle.”
There could be some white-knuckle moments for the government this month, with inflation likely to register a mild rebound because of booming consumption around the new year holiday, said Peng Wensheng, chief economist with China International Capital Corp.
But those same seasonal factors will work in China’s favour in February after the holiday ends and inflation “should pull back significantly” then, Mr Peng said.

January 12, 2012 2:51 am  By Simon Rabinovitch in Beijing
Link: http://www.ft.com/intl/cms/s/0/a77dde82-3cc3-11e1-8d38-00144feabdc0.html#axzz1jFEglMiz