China inflation eases to 15-month low

BEIJING (Reuters) - China's annual inflation rate eased to its lowest in 15 months in December, giving the government more room to tilt economic policy towards supporting growth as evidence mounts of faltering demand for Chinese goods home and abroad.

Consumer price inflation of 4.1 percent was just ahead of market expectations of a cooling to 4.0 percent in the benchmark Reuters poll of economists, but maintained the easing trend of the last five months to reinforce the view of many that the People's Bank of China is poised to ease monetary policy.

The annual rate of producer price inflation, at 1.7 percent, came in just below forecasts of 1.8 percent, underscoring the potential for downside surprises for corporate China as a deteriorating global backdrop knocks demand for goods from the factories of the world's second largest economy.

"China is more worried about an economic slowdown now and will continue the policy easing cycle," said Zhang Zhiwei, chief China economist at Nomura in Hong Kong.

"Loan supply will increase in the first three months and China will cut interest rates probably in March. We expect GDP growth will slow down rapidly to 7.5 percent in the first quarter."

Three sources familiar with government plans told Reuters on Wednesday that China has set a target of 8 trillion yuan ($1.27 trillion) in new local-currency bank loans and 14 percent growth in broad M2 money supply for 2012, implying a further loosening of PBOC policy to support the economy as growth loses steam and inflation cools.

Beijing cut the ratio of cash banks are required to hold as reserves by 50 basis points in November to 21 percent, the first such cut in three years, in a move to boost corporate credit lines and help firms counter falling demand at home and abroad.

Analysts in a recent poll by Reuters said they anticipated RRR cuts of at least 200 basis points through the course of 2012. Many expect to see a 50 bps cut before the Lunar New Year holidays next week.

Market reaction was muted given that data was broadly in line with forecasts.

Hong Kong's Hang Seng Index <.HSI> bounced to an early high in a subdued morning session, while the commodity-driven Australian dollar -- particularly sensitive to Chinese data -- traded steady at around $1.0300 to the U.S. dollar.

INFLATION STILL ABOVE TARGET

The December inflation figure was the closest it came in 2011 to hitting the official target of 4 percent, leaving the average rate over the 12 months at 5.4 percent.

That's still too hot for China's conservative leaders who are reluctant to shift policy settings too quickly towards all-out growth mode. They insist that fine-tuning is sufficient to keep the economy on a stable expansion path.

Private sector economists are similarly wary.

"I'm hesitant to call for benchmark lending rate cuts as the PBOC has fought hard to keep inflation under control after the post-2008 recovery credit expansion and relaxing price control efforts prematurely could see elevated inflation collide with slower growth," Connie Tse, an economist at consultancy Forecast in Singapore said.

In month-on-month terms, the consumer price index rose 0.3 percent in December from November, after a 0.2 percent fall in November. The figure is not seasonally adjusted.

An uptick in the annual rate of food inflation to 9.1 percent from November's 8.8 percent -- the lowest since September 2010 -- would be troubling for China's government if it signalled a rebounding trend in the cost of basic foodstuffs.

Food prices in an economy where average monthly salaries are just 3,000 yuan ($476) are the biggest driver of discretionary consumer spending -- precisely the area the government says it wants to rebalance the economy towards to insulate against the risk of falling demand from the United States and Europe.

"Inflation spikes in China are food price spikes. However, the 2010/11 shock was the first that wasn't caused by a supply failure," Tim Condon, head of Asian economic research at ING in Singapore, wrote in a note to clients.

"Pork prices increased rapidly during the 2010/11 spike, but it was a case of strong spending and the time it took for the supply response -- imports, hog breeding -- to kick in."

Annual food inflation hit a high of 14.8 percent in July 2011, driving overall consumer prices to a three-year peak of 6.5 percent.

Evidence of slower economic growth is mounting though, even while inflation is still not yet as tame as Beijing might like.

The country's customs agency said on Tuesday that China's exports and imports grew at their slowest pace in more than two years in December, fresh evidence of cooling domestic and global economic conditions that could push Beijing towards a more pro-growth policy stance.

China's annual economic growth in the fourth quarter of 2011 may have slowed to 8.7 percent from 9.1 percent in Q3, according to the latest Reuters poll.

The National Bureau of Statistics is due to publish GDP and other economic activity data at 0200 GMT on January 17.

(Additional reporting by Beijing Economics Team; Editing by Alex Richardson)

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