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Economists React: China Inflation Eases in June


2012年 07月 10日 source from The Wall Street Journal


China's consumer inflation eased in June, slipping back to its lowest level in two-and-a-half years, and leaving plenty of room for Beijing to use more aggressive policies to support flagging economic growth. The June consumer price index rose 2.2% year-on-year against a 3% rise in May well below the government's target of 4% for the year, according to the National Bureau of Statistics.

The NBS data also showed that deflation in the producer's price index intensified in June as the PPI fell 2.1% year-on-year after a 1.4% year-on-year drop in May.

Gross domestic product data for the second quarter is due out on Friday, and it is widely expected to be weaker than the first quarter's 8.1% year-on-year rise, which was the worst quarterly showing in three years. Over the weekend, Premier Wen Jiabao highlightedBeijing's concerns about the health of the economy, saying that it faces 'huge downward pressure.' The premier added that the government should stick to pro-active fiscal policies and prudent monetary policies, according to the Xinhua News Agency.

Analysts weigh in on the latest NBS data and key government policy moves:

Underlying price pressures are weak and will be no constraint to further policy easing. Premier Wen Jiabao made clear over the weekend that the government intends to keep loosening policy例The fall (in headline consumer price inflation rate) was broadly as expected. The drop was due to a big decline in food price inflation (from 6.4% to 3.8%). Non-food inflation was unchanged at 1.4%. Producer price inflation has now been negative for four months, and with commodity prices at their current level, looks likely to remain negative in 2013. Mark Williams, Capital Economics

Inflation continued to ease at a pace slightly faster than expected, which leaves sufficient room for Beijing to take further easing actions. As today's inflation cooled to the lowest level in two-and-a-half years and well below Beijing policymaker's 4% annual target, this explains why the [People's Bank of China] surprised the markets with a second rate cut in less than one month. Headline inflation is likely to trend even lower into the third quarter and remain tamed in the fourth quarter, which leaves inflation off Beijing's radar at least for the rest of this year. Sun Junwei, HSBC

The strong disinflation at the CPI level and deflation at the PPI level reveal weakness of demand, confirming a slowdown of growth towards the end of the second quarter of 2012. They highlight weaker pricing power of businesses and the difficulty of maintaining profit margins. They also explain why policymakers were able to cut rates again last week (for a second time in less than a month)例However, the data should not be overly dramatized, as the decline in CPI inflation can be fully attributed to lower prices of 'food' and 'transportation and communication.' Dariusz Kowalczyk, Credit Agricole CIB

Seasonally adjusted data exhibited downward inflation momentum. Food prices tend to be stable in July, and if international commodity prices continue to fall, another fuel price cut is possible during the month. In general, a negative output gap in China may keep non-food inflation subdued, despite electricity tariff hikes. These factors, together with a favorable base effect, will likely drive CPI inflation below 2% for a few months, but deflation is likely to be avoided with the expected rebound of demand in the second half of the year. Shuang Ding and Minggao Shen, Citigroup

These readings should be market-positive because falling inflation will provide more room for policy easing and stimulus例 We expect two 25-basis point symmetric interest rate cuts and three 50-basis point reserve requirement ratio cuts before year-end. The widening gap between year-on-year CPI and PPI inflation implies that profit margins could be improved for some downstream manufacturing sectors. However, declining CPI inflation and negative PPI inflation might also trigger market worries on deflation risks and weak growth例With the falling oil prices and base effect (especially for pork prices), we expect CPI inflation to drop further to around (or even slightly below) 2.0% year on year while PPI inflation could stay negative in the next several months. However, both year on year CPI and PPI inflation could rebound after August on lower bases and growth recovery. Ting Lu and Xiaojia Zhi, Bank of America-Merrill Lynch.

We reiterate our view that the current market sentiment on China is too bearish. Policy easing has indeed picked up as indicated by two interest rate cuts within the past month. Lower inflation creates space for further policy easing ahead. We expect CPI inflation to drop sharply again in July to below 2%. We expect full year 2012 CPI at 2.9%, well below the government's annual target of 4%. Premier Wen's speech over the weekend acknowledged downward pressures on growth and emphasized investment as the key to boosting domestic demand. We expect the government to cut the reserve requirement ratio twice over the rest of 2012, with the next cut as early as July. We do not expect further interest rate cuts in 2012. We believe growth will rebound in the third quarter and increase to slightly below 9% by the fourth quarter.

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