Chinese imports, inflation drop as economy cools

By Simon Rabinovitch and Zhou Xin

BEIJING (Reuters) - Chinese import growth slowed in October and inflation fell to a 17-month low as domestic demand cooled, making it likely that Beijing will cut interest rates soon to back up the government's huge new economic stimulus plan.

Imports last month rose 15.6 percent from a year earlier, well below expectations of 19 percent growth, customs data showed on Tuesday.

Exports rose 19.2 percent, beating market forecasts of an 18.8 percent rise, despite a sharp slowdown in Western economies and widespread factory closures in southern China.

"Domestic demand is dropping faster than external demand in China," said Tao Wang, UBS's economist in Beijing.

Exports would wilt as the world sank into recession, Wang said. "But at this stage much of the slowdown in China has been coming from domestic investment, especially related to construction. The much talked-about export shock has not really hit China yet," she added.

The result was an October trade surplus of $35.24 billion, smashing September's record of $29.36 billion and providing a stark reminder of the imbalances plaguing the global economy.

That issue will be on the table when leaders of the G20 group of rich and developing countries meet in Washington on Saturday to examine the causes and effects of the global financial crisis.

Most economists expect China's exports to weaken once remaining pre-Christmas orders have been shipped, but Zhou Xi, an analyst with Bohai Securities in Tianjin, thinks they will prove more resilient than many expect.

"A lot of Chinese exports are daily necessities and are not sensitive to the economic cycle," Zhou said.

OVERCAPACITY

Inflation figures for October also cast a light on weakness in the world's fourth-largest economy that prompted the government to rush out a 4 trillion yuan ($586 billion) package of spending and investment on Sunday evening.

Consumer prices rose 4.0 percent in the year to October, down from September's reading of 4.6 percent and below market forecasts of 4.2 percent. It was the sixth consecutive monthly decline in the annual inflation rate.

Food prices, which make up a third of the consumer basket, rose 8.5 percent in October from a year earlier, slowing from an increase of 9.7 percent in the 12 months to September, the National Bureau of Statistics said.

Core inflation excluding food also fell, to 1.6 percent in October from 2.0 percent in September, possibly pointing to overcapacity in manufacturing. Clothes and cars both were cheaper last month than in October 2007.

"It shows that the Chinese economy is in a sharp slowdown -- production is falling, so is demand," said Zhang Yongjun, an economist with the State Information Center, a government think tank in Beijing.