Window to further relax monetary policy has not closed

Growth in China's consumer price index weakened for the fourth consecutive month in August to indicate the lowest inflation rate in almost a year, which analysts say leaves room for China to loosen its monetary policy to stabilize economic growth.

The CPI rose by 1.3 percent year-on-year, which is the lowest rise since October and down from 1.8 percent in July. The slackening growth can be attributed to falling food prices, the National Bureau of Statistics said on Sept 9.

In August, pork prices rose by 6.4 percent year-on-year compared with 16.1 percent in July, and egg prices fell by 7.4 percent compared with 2 percent the previous month.

"It could be the lowest (monthly) reading this year," says Liu Dongliang, an analyst at China Merchants Bank. "The CPI rises in the first half of the year triggered market concerns, but they had been caused by abnormal weather conditions and (cyclical) pork price rises, which are short-term factors that cannot change the overall weak market demand."

Lian Ping, chief economist at Bank of Communications, says no major spikes in consumer inflation are expected in the coming months, although the index may show year-on-year increases in October and November due to the relatively low base a year earlier.

China's window to further relax its monetary policy has not closed and the possibility of such a move remains high in the rest of this year, Liu says, adding that movement in the producer price index will have a major bearing on whether the monetary policy will be relaxed.

The NBS says the PPI, a gauge of factory-gate prices that indicates the rate of economic activity, dropped by 0.8 percent year-on-year in August compared with 1.7 percent in July.

The slowing of the decline indicates that the economy could be steadying, analysts say.

"It is a sign of improving industrial production," according to Liu.

China's factory-gate prices have been falling since March 2012, but analysts say that as the industrial sector improves on the back of the housing recovery and rising commodity prices, it could climb into positive territory in the fourth quarter, limiting the full-year PPI decline to 2 percent, Nomura Securities say in a research note.

The slowing decline in PPI could reduce the possibility of relaxing monetary policies, but given the restrictive policies targeting the real estate sector and the expected modest fiscal expenditures in the coming months, which will drag on real estate and infrastructure activities, China will still face heavy downward pressure, Liu says.

An expected interest rate hike by the US Federal Reserve would cause capital outflows, which would also raise the possibility of loosening monetary policy in China, he adds.

xinzhiming@chinadaily.com.cn