China's inflation at 17-month low, leaving room for rate cuts

ATTENTION - ADDS analyst comments ///

China's inflation rate hit a 17-month low, official data showed Tuesday, leaving greater room for cutting interest rates at a time when the global crisis has made economic growth the top priority.

The consumer price index in October was up 4.0 percent in October, compared with 4.6 percent the previous month and the lowest level since May last year, according to figures from the National Bureau of Statistics.

"Now the government can be more proactive about keeping up growth without having to worry about curbing price increases," said Zhang Xinfa, a Beijing-based economist with Galaxy Securities.

"It provides more room for monetary policy measures such as interest rate cuts and cuts in the bank reserve requirements," he said.

China cut lending rates in September for the first time in six years, but since then it has chopped rates two times more.

China's central bank suggested there might be more cuts in the offing, saying in a statement on its website late Monday that it would now implement a "moderately easy" monetary policy.

The environment is right for this type of policy, as inflation in the world's fourth-largest economy has been on a steady declining trend since hitting a near 12-year high of 8.7 percent in February.

As consumer prices have moderated, the government has gradually shifted its emphasis away from inflation control -- the top policy concern at the start of the year.

Since then, the global financial crisis has started having an impact, and with China's trade surplus likely to shrink this year, economic growth has become the dominant policy objective in Beijing.

China unveiled a 586-billion-dollar stimulus package this week, in the strongest indication yet that the government is concerned about the impact the global crisis is having on domestic growth.

The fiscal stimulus was welcome news but it will take time for its effects to be felt, and in the meantime, both inflation and activity growth are expected to fall further.

"The consumer price data point to deflation, which would mean big trouble for China," said Hu Yuexiao, a Shanghai-based economist with Shanghai Securities.

Deflation, falling prices, is in some ways a bigger problem than inflation, because it encourages consumers to spend less because they expect to get more for their money if they wait.

That could be a huge challenge for China at a moment when it is trying to make consumer spending account for a larger share of growth.

The consumer price data were released a day after China announced wholesale prices -- another inflation gauge -- eased to 6.6 percent in October, down from 9.1 percent in September.

Food prices, the main factor in driving up consumer prices in China recently, rose by 8.5 percent in October, down from 9.7 percent in September, according to the bureau.

In the first 10 months of the year, China's consumer price index increased 6.7 percent from the same period last year.

China's fourth quarter CPI is likely to fall within Beijing's target of 4.8 percent, but high inflation in the first half of the year means it is unlikely to meet its target for the whole year, Moody's economist Sherman Chan said.

"Nevertheless, slowing inflation gives the People's Bank of China the green light to cut interest rates in coming months, helping to shore up the cooling economy," she said.