* China inflation tumbles to lowest since Sept 2010
* Industrial output weaker than expected
* Retail sales figures a surprise, shows pick up from Oct
* Weaker inflation gives central bank room to loosen
* Beijing may focus more on supporting jobs
By Aileen Wang and Nick Edwards
BEIJING, Dec 9 China's industrial output
growth dropped in November to its slowest pace in more than two
years and inflation tumbled as economic conditions deteriorated,
raising expectations that Beijing will pursue a more pro-growth
policy to support jobs.
Easing inflation pressure on consumers at the same time as
data signals a serious risk of a sharp industrial slowdown is
potentially perilous for policymakers trying to engineer a soft
economic landing against a backdrop of a deepening crisis in
China's main export market -- debt-ridden Europe.
"The sharp contraction in the real economy, the external
uncertainties lingering on, plus the easing inflationary
pressure all point to a larger scope for further policy easing.
So the basic tone of the macro policy will lean towards the
pro-growth side," said Nie Wen, analyst at Hwabao Trust in
A deluge of data on Friday showed China's annual consumer
inflation rate tumbled in November to 4.2 percent, the lowest
level since September 2010 and slightly below expectations. It
was the first time since February it had fallen below 5 percent.
Inflation has dropped from a three-year high of 6.5 percent
in July, allowing Beijing to shift its policy stance towards
offering support for the economy, especially as CPI is now
closer to the full-year government target for 2011 of 4 percent.
But it was an eye-watering collapse in producer price
inflation -- down to just 2.7 percent in November, roughly half
the rate of October and in outright deflationary territory
month-on-month -- that has many economists anticipating a shift
to a more explicit pro-growth policy.
Industrial output growth slowed sharply to 12.4 percent in
November from 13.2 percent in October. The outcome was below
expectations and marked the weakest pace since August 2009
during the global financial crisis, Reuters data shows, a
worrying sign for the sector at the centre of China's export
Factory activity, in fact, contracted in November from
October, China's official purchasing managers' index (PMI)
showed last week.
"The risks (of a hard landing) are clearly there," said
Stephen Green, an economist at Standard Chartered Bank in Hong
Retail sales in November meanwhile rose 17.3 percent from a
year earlier, slightly outpacing October's 17.2 percent and
confounding economists forecasting a slowdown to 16.9 percent.
For most of 2011, Beijing has been preoccupied with beating
down inflation. Even with the sharp fall in November, inflation
has averaged 5.5 percent so far this year, well above the
government's target, so the government will be wary of tilting
policy too far towards loosening.
But they have offered more support to small businesses as
signs of the economic slow down increased and signalled a
further shift to a loosening policy on Nov 30 by cutting bank
reserve requirements for the first time in three years.
Now analysts expect a further subtle shift of emphasis to
supporting industry by protecting against lost jobs instead of
lost consumer spending power, showing Beijing's obsession with
social stability remains at the heart of policy.
A pronounced slowdown in China could lead to lay offs for
millions of migrant factory workers. The Federation of Hong Kong
Industries recently warned up to a third of some 50,000 Hong
Kong-owned factories in adjoining Guangdong and elsewhere in
China could downsize or close by the end of 2011.
Analysts expect further cuts in bank reserves to release
more cash into the economy as soon as this month and cuts in
interest rates in the first or second quarter of next
Xinhua news agency said on Friday that the Communist Party's
top leaders would maintain a "pro-active" fiscal policy in 2012.
Reflecting Beijing's wariness about reawakening the
inflation dragon, monetary policy would remain "prudent", Xinhua
The decisions will be rubber stamped by the Central Economic
Work meeting, expected next week and the biggest annual event in
China's economic calendar.
"The meeting is usually held in November; the delay may
reflect the confusing global climate, complicated domestic
challenges, and disagreement about the best policy mix. While a
shift to pro-growth policy is expected, markets are focused on
what exactly Beijing plans to do," Standard Chartered wrote in a
note to clients after Friday's data deluge.
CONFIDENCE IN EUROPE
China's economic growth has slowed down for three
consecutive quarters and economists widely expect full-year
growth in 2012 to be below 9 percent for the first time since
2001 as business feels the impact of weakening demand from
American buyers and Europe's festering debt crisis.
Beijing again expressed its confidence in the European
Union's ability to beat the crisis at a scheduled briefing by
the Foreign Ministry on Friday, even as a meeting of EU leaders
met in Brussels looked set to fail to strike a straightforward
deal to calm volatile global financial markets.
"We're still awaiting the final outcome of the meeting. We
have always stated that China has always had confidence that the
EU has the ability and the wisdom to resolve the problems
related to the temporary difficulties it currently faces, and
that stance has not changed," ministry spokesman, Hong Lei said.
But fears of a collapse in demand from Europe are especially
acute among investors worried about the impact on corporate cash
flow and profits if China's biggest export market implodes.
Evidence has grown that the real economy -- especially
private businesses that create most new jobs -- is being starved
of affordable credit.
Those concerns in part triggered a net outflow of
capital from China in October -- the first such outflows in four
years -- when worries about the global economy prompted some
investors to withdraw speculative funds.
The cut in bank reserves, or cash that banks must put aside,
took effect on Dec. 5, releasing between 350 billion yuan and
400 billion yuan ($55 billion to $63 billion) into the banking
Inflation will still be key to determine how much room the
central bank has to keep cutting 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.
With average inflation this year running at 5.5 percent, any
policy loosening will be measured and likely to eschew outright
interest rate cuts for now, economists argue.