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    Economy

    Subdued April inflation presages more monetary easing

    1
    2015-05-10 08:22Xinhua Editor: Wang Fan

    Despite improving consumer inflation and stabilizing producer deflation in April, analysts said China may still need further monetary loosening measures to boost market vitality.

    The consumer price index (CPI), the main gauge of inflation, grew 1.5 percent year on year in April, the National Bureau of Statistics (NBS) announced Saturday.

    The reading slightly rebounded from 1.4 percent in March and 0.8 percent in January, the lowest level in more than five years.

    "Due to a relatively low base, food prices rose quickly in April, driving up the CPI growth," said NBS senior statistician Yu Qiumei.

    The producer price index (PPI), a measure of costs for goods at the factory gate, plunged 4.6 percent year on year in April, marking the 38th-straight month of decline, which suggests anemic overall market demand.

    On a monthly basis, April PPI dipped by 0.3 percent, widening from a 0.1 percent drop registered in March. Yu attributed the sharper decline mainly to lower fuel prices and coal production costs.

    Wang Tao, UBS chief China economist, said rapidly declining producer prices pointed to still frail domestic demand and worsening corporate balance sheet.

    Both CPI and PPI fell short of wide market expectations of a 1.6 percent increase and a 4.5 percent drop, respectively. Qu Hongbin, chief economist for China at HSBC, said deflationary risks have yet to be alleviated.

    SLIDE OR REBOUND?

    A healthy economy usually needs mild inflation, which is in turn a reflection of robust economic growth.

    GDP grew 7.4 percent in 2014, the weakest annual expansion in 24 years. ICPI grew two percent for the whole of 2014, the lowest level since 2010.

    During the January-April period, average CPI growth stood at 1.3 percent, while that annual inflation control target is around 3 percent.

    Xie Yaxuan, chief macroeconomic analyst with CMS Securities, predicted that CPI will continue to dip to around 1.2 percent in May and then bottom out.

    "We forecast 1.5 percent CPI growth for the whole year," said Xie.

    Economist Song Qinghui said inflation will rebound in the latter half of 2015 along with the improving real economy, which has shown signs of stabilization.

    MORE POLICY SUPPORT

    GDP growth outperformed market expectation posting 7 percent in the first quarter, in line with the annual target set for the whole of 2015.

    However, a recent meeting of the Political Bureau of the Communist Party of China Central Committee, China's top decision-making body, acknowledged that the economy faces "heavy downside pressure", which would "warrant close attention and a forceful policy response".

    "Further policy support would be needed if GDP growth were to get close to this year's target," said UBS's Wang.

    Liu Xuezhi, a senior researcher with the Bank of Communications, said weak inflation will open room for more monetary easing measures, which will typically push up the overall price level.

    The central bank said on Friday in a quarterly report that it will use monetary policy tools to manage liquidity in the market and adjust its policy in line with supply of and demand for liquidity, inflationary pressure and economic development.

    "We think the central bank may cut deposit reserve requirement ratio [RRR] by at least 100 basis points in the rest of the year," said Wang, adding that action to lower interest rates and facilitate local government debt swap are also very likely.

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