China consumer inflation hits 30-month low

Aug 09, 2012, 7:49 AM EDT

* China July CPI up 1.8 pct from a year ago vs +1.7 pctf'cast

* July PPI down 2.9 pct yr/yr vs -2.5 pct f'cast

* Consumer inflation at 30-mth low, gives room for easing

* Economic activity seen picking up modestly in July

* Industrial activity data due at 0530 GMT

By Kevin Yao

BEIJING, Aug 9 (Reuters) - China's annual consumer inflationfell to a 30-month low in July, suggesting that the central bankhas scope to ease policy further after rate cuts in June andJuly to keep the economy on track to meet an official 2012growth target of 7.5 percent.

The government is on track to ease policy to cushion theimpact of global headwinds on the world's second-largesteconomy, but needs to tread cautiously to avoid reignitingproperty sector risks and fuelling renewed consumer price rises.

Annual consumer inflation eased to 1.8 percent in July from2.2 percent in June, pulling back further from a three-year highlast July of 6.5 percent, official data released on Thursdayshowed. Economists polled by Reuters had forecast inflation toease to 1.7 percent in July.

"This number gives more room for policy easing," said Zhang Zhiwei, chief China economist at Nomura in Hong Kong.

"It is now pretty clear that CPI will likely be below theofficial 4 percent target for the year, so the policy focus forthe government can stay clearly on growth."


Hopes of further easing from China boosted riskier assets,with Asian shares rising to a three-month highand the commodity-sensitive Australian dollar testing a4-1/2-month peak.

Consumer prices edged up 0.1 percent in July from theprevious month, compared to expectations of a 0.1 percent drop.

Still, there is little sign of inflationary pressures comingfrom factories. July's data showed that producer prices fell inJuly by 2.9 percent from a year earlier, a sharper decline thanthe 2.5 percent forecast and the steepest fall since October2009.

It marked a fifth straight month of falling producer prices,reflecting the pressures eating into corporate earnings andcapping capital spending.

President Hu Jintao and Premier Wen Jiabao have promised tostep up policy "fine tuning" in the second half of the year tosupport the economy.

Apart from lowering interest rates, Beijing has also cut theamount of cash that banks must hold as reserves to free up anestimated 1.2 trillion yuan ($191 billion) for lending in aseries of moves since November 2011.



Food prices rose 2.4 percent in July from a year earlier,cooling from 3.8 percent in June as pork prices tumbled 18.7percent, while non-food inflation accelerated slightly to 1.5percent in July from 1.4 percent in June.

Rising global food prices fuelled by a severe drought in theUnited States will have a limited impact on Chinese inflation,but volatile food prices could be a cause for concern.

"Food price fluctuation could act as a drag on the furthereasing of China's consumer inflation in August. But non-foodprices will continue to fall on slowing growth," said Li Wei,China economist at Standard Chartered Bank in Shanghai.

"We will need to watch lending and activity data to seewhether demand is recovering. If they disappoint, thepossibility of another interest rate cut will increase greatly."

The central bank said in a report last week consumerinflation might rebound after August due to seasonal factors andthe rising cost of labour and resources.

The benchmark Reuters poll last month showed analystsexpected the central bank to deliver its next interest rate cutin the third quarter and two more cuts in banks' reserverequirement ratio by the end of the year.


Industrial output and fixed-asset investment data, due forrelease later on Thursday, were expected to show signs of apick-up in activity, indicating that the economy is starting tostabilise after sliding for six straight quarters.

Still, any economic improvement will be fragile as the eurozone debt crisis and a sluggish U.S. recovery keep global growthat a low ebb, the main factor that pushed China's new exportorders in July into their steepest fall in eight months.

"The recovery will be very modest - more like stabilisationand gradual improvement," said Yiping Huang, chief economist foremerging Asia at Barclays Capital in Hong Kong, speaking beforeThursday's data releases.

China's industrial output growth is forecast to pick up to afour-month high of 9.8 percent year-on-year in July from 9.5percent in June, a Reuters poll showed.

Annual growth in fixed-asset investment, in the likes ofreal estate, roads and bridges, is seen nudging up inJanuary-to-July to 20.5 percent from January-to-June's 20.4percent, as the government seeks to spur infrastructureinvestment.

Growth of retail sales, the biggest driver of the economy'sexpansion in the first quarter, is seen steady though at 13.7percent.

Analysts see a pick-up in growth in the third quarter to 7.9percent and full-year growth of 8 percent, above the officialtarget.

Economic growth has been sliding since the beginning of 2011,reaching 7.6 percent in the second quarter, the weakest pacesince the global financial crisis.