China: Sharp Decline in Inflation

Econintersect:  China has reported a sharp decline in inflation for October.  The new rate of 5.5% was down from 6.1% a month earlier.  This was the third consecutive decline since a high of 6.5% in July.  All rates are year-over-year.

The trend appears to be continuing in November.  According to Philip Aldrick, Economics Editor of the Telegraph, China’s Premier We Jiabao said on a government website: “Since October, overall domestic prices have been falling noticeably.”  The good news on inflation is raising speculation that China will again increase pro-growth policies.  This could come at a good time as Europe struggles with a financial crisis and the U.S. economy remains weak.Bloomberg/Businessweek reported today (Saturday, November 12) that China appears to be increasing lending.  The credit easing, apparently matched with declining inflation, marks China’s efforts to support growth at a time when the debt crisis in Europe could be damaging to their exports to the Eurozone.  China has also been experiencing a real estate market cooling.  Shanghai Daily reports that new home prices are down 5.1% year-to-date through October.  Bloomberg says that lending in China increased by $93 billion I October, an annualized rate of more than $1.1 trillion.  The increase in lending was the largest in four months, and exceeded the level of September ($74 billion).  Sources report that lending will likely continue to be eased through the fourth quarter.

Another sign of weakness in the Chinese economy was reported this week by Reuters:

Chinese industrial output grew at its weakest annual pace in a year in October and inflation fell sharply, raising expectations Beijing will do more to support economic growth by “fine tuning” policy.

A flurry of data on Wednesday showed that China’s factories are bearing the brunt of a modest economic slowdown even as consumer spending and investment in assets such as roads and other infrastructure remain resilient.

Moves that China could take in addition to increased lending should a slowdown build any momentum would include interest rate cuts (currently 6.56%) and lowering bank reserve requirements, which are now at 21.5% after a series of increases.

China has had a 4% inflation target and experts are now projecting that inflation may fall near that level by year end.

Sources:  The Telegraph, Bloomberg/Businessweek, Shanghai Daily and Reuters