BEIJING – Last June, economists made a forecast that China’s inflation rate would go down 2.3%. Official data that was released last Monday showed that the annual consumer inflation rate in China fell to 2.2% in June from the 3.0% rate they had in May. This information gives Beijing more room to ease a new monetary policy for growth rowth without generating upward pressure in prices.
The Office for National Statistics said the producer price index in China fell 2.1% over the previous year, down more than estimates of 1.9%.
“Inflation is no longer an imminent threat to China,” said Dongming Xie, an economist at OCBC Bank in Singapore.
“We expect the July CPI to fall below 2%. August and September are important months for monitoring the perspective of inflation. If prices fall too fast, feeding deflationary expectations, it is possible that China will further reduce their rate interests,” he said.
The fall of the PPI, for the the fourth consecutive time, helped build expectations among economists that consumer inflation in the second largest economy will fall further in coming the months.
The fall of the PPI also underlines the risk that producer prices may go down not only due to base effects of the falling prices of raw materials, but also because of the final demand for the industrial production of China. The country’s export demand has considerable fallen due to the weakened global economy.
Prime Minister Wen Jiabao seems to be aware of the situation as he was quoted saying that more aggressive efforts are needed to support growth, but within the mantra of “fine tuning” policy adopted by officials since last fall.
“The current economic situation in China is generally stable, but still faces a relatively enormous downward pressure. We should increase the strength of fine-tuning of policy,” said Wen during a visit to the eastern province of Jiangsu.
“China should continue its proactive fiscal policy, focusing especially on improving policies for structural tax cuts, while still implementing a prudent monetary policy to effectively address the structural contradiction between supply and demand of credit.” added Wen.
China’s central bank unexpectedly cut interest rates for the second time last week in a bid to boost growth. It has also reduced the required reserve ratio for banks in three steps of 50 basis points since November 2011, releasing an estimated 1.2 billion yuan ($190 million) for loans.
The inflation report begins a week of disclosure of important data on China’s economy, it will also include the release of GDP growth data for the second quarter.
Reuters’ poll of analysts estimated that China’s economy grew by 7.6% in the second quarter compared to a year earlier. That would mark the weakest quarterly expansion since the first quarter of 2009, during the global financial crisis.
China’s GDP grew by 8.1% in the first quarter of 2012 versus the same period in 2011.