China February inflation tame, room for policy easing

BEIJING Sat Mar 8, 2014 10:58pm EST

A vegetable vendor waits for customers at a market in Beijing February 14, 2014. REUTERS/Kim Kyung-Hoon

A vegetable vendor waits for customers at a market in Beijing February 14, 2014.

Credit: Reuters/Kim Kyung-Hoon

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BEIJING (Reuters) - China's consumer prices rose at their slowest rate in 13 months in February as pork prices fell by their most in over a year, a sign that slowing growth rather than rising prices poses a bigger risk to the world's second-biggest economy.

The consumer price index rose 2 percent in February from a year earlier, the National Bureau of Statistics said on Sunday, exactly in line with market expectations. Pork prices fell 9 percent.

And in an indication that China's wobbly economy is fighting substantial slack, producer prices fell for the 24th consecutive month by dropping 2 percent, slightly above forecasts for a 1.9 percent drop.

The tepid price data could fuel investor worries about the health of China's economy, which drew new concerns this week after figures showed export growth slumped by nearly a fifth last month.

Some analysts say at least with inflation clearly not a threat, China will have the room to loosen policies to bolster the economy if it needs to.

"Low inflation could be good news for markets as monetary tightening is definitely not justified," said Ting Lu, an economist at Bank of America-Merrill Lynch.

"Low inflation gives the People's Bank of China more room to ease the liquidity situation and tame rising rates."

After 30 years of stellar annual growth rates that averaged at least 10 percent, China's maturing economy is shifting gears and moving into slower but high-quality growth, away from its previous export- and investment-driven model.

But the transition has not been easy. Much of the data out this year showed the powerful Chinese growth engine has had a difficult start as factories fought multi-month low business orders and export growth whipsawed, unnerving global investors.

That has led a growing number of analysts to say China may need to ease policies to support growth if it wishes to meet its annual 7.5 percent growth target, slightly below last year's 7.7 percent expansion.

Yet it is not clear the target is binding. China's Finance Minister said this week that it is all right if China slightly misses its economic growth target as long as enough jobs are created, suggesting that Beijing is ready to stomach slower growth to make room for sweeping reforms.

DEFLATION THREAT?

For some economists, however, China's stubbornly weak producer prices are the most worrying.

After falling every month for two years, producer deflation shows no signs of abating. Instead, the producer price index fell by its most in seven months in February.

Prices were down across the board, from means of production to raw materials -- both of which were at their weakest in seven months.

Analysts do not agree on what is driving producer prices lower. Some say it is a symptom of sluggish consumer demand. Others say it is a result of excess capacity in a handful of raw material industries including cement, glass, and steel.

"The risk of deflation is rising in the near term," ANZ economists Liu Li-Gang and Zhou Hao said in a note.

"GDP growth in the first-half of 2014 will likely be below 7.5 percent, which could trigger further policy easing over the foreseeable future."

No analysts believes China will launch another big-bang government spending package to stimulate the economy, given the country is still suffering from the repercussions of its last pump-priming package in 2008/09 worth 4 trillion yuan.

Instead, analysts think the government may keep interbank rates low to support lending, and increase spending in areas that support a new Chinese economy, such as the environment.

Month-on-month, consumer prices rose 0.5 percent versus a forecast of a 0.8 percent rise.

(Reporting by Koh Gui Qing; Editing by Michael Perry)

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