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Jun 09, 2012, 07.14 PM IST | Source: Reuters

China economy weak in May, inflation at 2-yr low

China's inflation dipped to a two-year low in May while economic activity remained weak, reinforcing expectation that further policy easing could be in the pipeline to head off a sharper slowdown in the world's second-largest economy.

China economy weak in May, inflation at 2-yr low

China's inflation dipped to a two-year low in May while economic activity remained weak, reinforcing expectation that further policy easing could be in the pipeline to head off a sharper slowdown in the world's second-largest economy.

The spate of data released by the National Bureau of Statistics on Saturday was not as grim as the market had feared after China's surprising interest rate cut this week - the first since the depths of the 2008/09 global crisis.

Industrial output rose 9.6 percent in May from a year earlier, picking up slightly from the 9.3 percent pace in April but was still near the weakest level in three years.

Fixed-asset investment rose 20.1 in the January-May period from a year earlier, easing a little from 20.2 percent in the first four months and hovering near a decade-low, while retail sales growth slowed to 13.8 percent in May from April's 14.1 percent.

Reuters polls published earlier in the week forecast industrial output to rise 9.9 percent in May, while retail sales were seen up 14.3 percent and fixed-asset investment was seen at 20 percent.

But the central bank's interest rate cut on Thursday had fanned market fears that data for May could be rather gloomy.

"The data may not be as grim as the market had feared but economic activity remains sluggish in May," said Hua Zhongwei, economist at Huachuang Securities in Beijing.

"The economy could stabilise if the government takes effective stimulus measures, but there are also risks that growth could slow down further," he said.

China's economy in graphics: http://link.reuters.

FALLING INFLATION

China's consumer inflation cooled faster than forecast to two-year lows of 3 percent in May, and is widely expected to head even lower in coming months.

"Price pressures eased in May and the easing could accelerate in coming months. This supports the central bank's move to cut interest rates," said Zhang Yongjun, an economist at China Center for International Economic Exchange, a top government think-tank.

In a sign that price pressures could slow further, China's producer prices also fell more than forecast by 1.4 percent from a year ago, compared with estimates for a 1.1 percent decline, marking the third straight month of producer price deflation.

May's inflation reading is the lowest since June 2010.

"June inflation is very likely to dip below 3 percent and probably cool further towards the year-end," Zhang said. "We cannot rule out the possibility of more rate cuts, and the reserve requirement ratio should be cut more frequently."

The price data comes just two days after China's central bank cut lending and saving rates by 25 basis points to put a floor beneath slackening economic growth.

That price pressure is cooling is in stark contrast to the situation a year ago, when consumer inflation raced to a three-year peak of 6.5 percent in July, prompting authorities to stridently tighten monetary policy.

Food inflation, the top concern for shoppers and policymakers, moderated to 6.4 percent in May from April's 7 percent, as falling fruit and pork prices offset a jump in vegetable prices.

STIMULUS

With China drawing closer to a once-a-decade leadership change, the government is keen for the economy to grow steadily to provide jobs.

Premier Wen Jiabao has vowed to keep the economy growing at a "relatively fast" pace, and the government has accordingly fast-tracked investment projects to help offset a spending slowdown caused by a government campaign to tame the property sector.

Even before Thursday's rate cut, the central bank had lowered banks' reserve requirements twice this year by a total of 100 basis points to loosen credit conditions.

Still, analysts predict China will not unveil another massive 4 trillion yuan stimulus package, as it did during the 2008/09 crisis, which left a frothy house market and a mountain of debt in its wake.

"Economic growth could stabilise in the coming month as the government's stimulus measures take effect," said Shen Lan, China Economist at Standard Chartered Bank in Shanghai.

A Reuters poll in May forecast China will deliver its weakest quarter of economic growth in three years in the second quarter at 7.9 percent, its sixth straight quarter of slowing growth. Full-year growth is seen at 8.2 percent - its slowest in 13 years.

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