* China consumer inflation in Nov drops to 4.2 pct
* Below forecast of 4.4 pct and down from 5.5 pct in Oct
* Producer prices up 2.7 pct, versus forecast of 3.3 pct
* Weaker inflation gives central bank room to loosen
* Data due later includes industrial output, retail sales
By Lucy Hornby and Kevin Yao
BEIJING, Dec 9 China's annual inflation
rate tumbled in November to 4.2 percent, the lowest level in
more than a year, fuelling expectations of further monetary
policy easing to combat deteriorating domestic and international
The rate has dropped rapidly since hitting a three-year high
of 6.5 percent in July and is now at a pace closer to the
full-year government target for 2011 of 4 percent.
That leaves room for Beijing to push through further cuts in
bank reserves to free up cash for lending, analysts say, but
policy loosening will be measured for fear of reigniting
"It's clear now that China's inflation is easing, and the
process of easing is faster than expected," Wang Guobing, an
economist with Northeast Securities in Shanghai said. "But it's
still too early to say that China will turn to a full and
complete policy relaxation," he said.
"Inflation will hover around 4 percent in the coming months,
and the government still has to seek a balance between growth
and inflation control," Wang added.
That balance will be tough to strike because inflation so
far in 2011 has averaged 5.5 percent, even though the November
rate was the first below 5 percent since February and the lowest
since September 2010.
But analysts -- who had forecasts in a tight range of
4.2-4.6 percent in the benchmark Reuters poll to deliver a
consensus call of 4.4 percent -- eye the risk of a rapid cooling
of the economy as signalled by an even starker fall in the rate
of producer inflation.
"Inflation is marching south at an aggressive pace, with the
producer price inflation virtually collapsing -- down to just
2.7 percent year on year, almost half of that last month and
tumbling into deflation in month-on-month terms at minus 0.7
percent," said Alistair Thornton, an economist at IHS Global
Insight in Beijing. Producer inflation in October was 5 percent.
"Warning signs of this sharp trend have been evident in the
buy-up price sub-index of the PMI, highlighting strong downward
pressure on prices amid an increasingly gloomy global outlook."
China's HSBC purchasing managers' index on manufacturing
dropped to a 32-month low in November, suggesting sector
activity was shrinking. Its various sub-component indexes
suggested demand was weaker at home than abroad.
Hua Zhongwei, an economist at Huachuang Securities in
Beijing, reckons the data shows China's policies have to shift
to a pro-growth bias in a stronger and quicker way.
Inflation running well above the government's target had
forced Chinese planners to keep monetary policy tight, even as
evidence grew that the real economy -- especially private
businesses that create most new jobs -- was being starved of
credit at affordable rates.
But moderating price pressures, as well as easing money
supply pressure, allowed the People's Bank of China on the last
day of November to announce a cut in the ratio of reserves banks
must hold, a clear signal of a policy shift after a two-year
It was the first RRR cut in three years and came into effect
on Dec 5, releasing between 350 billion yuan and 400 billion
yuan ($55 bln to $63 bln) into the banking system.
"We expect the central bank to lower the RRR four more times
next year," said Dongming Xie, an economist at OCBC Bank in
Inflation rates will help determine how much room the
central bank has to further cut reserve rates and unleash up to
16 trillion yuan tied up in the banking system.
China's government -- which ultimately sets monetary policy
-- is constrained by inflation as rising prices have a history
of spurring social unrest. A big injection of cash could easily
reignite sharp price rises.
Market showed no specific reaction to the Chinese data as
investors focused on an EU summit meeting in Brussels aiming to
map a way out of the euro-zone debt crisis. The euro, U.S. stock
futures and the Australian dollar fell on disappointment at the
headlines emerging from the meeting.
Other Chinese data due later on Friday, including industrial
output and retail sales, is expected to demonstrate the slowdown
in the domestic economy, which bodes ill for China's efforts to
turn to its home market as European and American demand for its
Annual retail sales growth is estimated to have weakened to
16.9 percent in November from 17.2 percent in October and 18.7
percent in November 2010.
Industrial production growth likely slowed to 12.8 percent
from more than 13 percent in data the month before. The
country's official purchasing managers' index showed that
factory activity in November shrank from October.
The softening in producer price pressures comes despite
stronger oil prices, which are about 15 percent higher in dollar
terms now than they were a year ago.
By contrast, the price of iron ore, a commodity whose value
has been primarily driven by China's gargantuan demand for steel
over the past decade, is down by over 20 percent compared with a