Economists say lower inflation leaves more room for policy easing

Chinese consumer inflation will remain moderate in the fourth quarter because of seasonal factors, according to the country’s top economic planner on Oct 15, dispelling worries about deflation but acknowledging that some price increases are coming.

Li Pumin, spokesman for the National Development and Reform Commission, said at a news briefing that consumer prices are unlikely to rise sharply, but they will rise nonetheless.

“As the weather is getting colder and there are more holidays in the coming months, food prices are expected to go up. The seasonal factor will also boost service prices,” Li said.

The forecast comes one day after the National Bureau of Statistics’ report about the September Consumer Price Index, which came in at 1.6 percent, down from 2 percent in August. The reading was lower than the market prediction of around 1.8 percent.

The weaker-than-expected consumer inflation, combined with a 43-month consecutive contraction of the Producer Price Index, which fell by 5.9 percent last month from a year earlier, caused some analysts to speculate that the economy may be trapped in a deflationary situation.

“The year-on-year drop of the recent CPI was because last year’s influence on prices is weaker. In terms of monthly growth, the 0.4 percent rise in the price of pork, which was much less than the 7.7 percent in August, dragged down about 0.24 percentage points of the CPI,” according to Li.

Sheng Laiyun, a senior economist at the NBS believes the world’s second-largest economy is still far away from deflation.

“There is sufficient space to take more measures to stabilize growth, such as further easing of monetary policy,” Sheng said.

The People’s Bank of China, the nation’s central bank, said on Oct 15 that by the end of September broad money supply, or M2, reached 135.98 trillion yuan ($21.5 trillion), up 13.1 percent year-on-year. The growth rate was slightly lower than the 13.3 percent in the first eight months but higher than the government’s target of 12 percent.

In the first three quarters, the central bank issued yuan-denominated loans worth 8.99 trillion yuan to support real economic growth, which was 1.35 trillion yuan more than the same period last year, a report of the bank’s showed.

In September, the new yuan loans increased by 1.05 trillion yuan, higher than the 809 billion yuan in August.

Liu Ligang, chief economist in China for ANZ Bank, suggested that more credit support is needed in the near future to stabilize growth. Meanwhile, some creative tools, such as collateralized relending, will be used to ensure sufficient liquidity in the financial system.

Song Yu, chief economist for Goldman Sachs in China, said that lower CPI inflation “leaves more room for policy easing”.

“We continue to expect further easing on the monetary policy front, including a cut of 25 basis points in the benchmark interest rate and a cut of 100 basis points in the reserve requirement ratio by the end of the year,” he said. “But we believe policymakers are also likely to rely on fiscal measures and policy banks to support growth.”

Key government moves this year

The National Development and Reform Commission imposed sanctions against monopoly pricing worth 6.6 billion yuan ($1.1 billion) this year.

The NDRC is working on an anti-monopoly guideline for the automobile industry.

The commission approved 218 fixed-asset investment projects worth 1.81 trillion yuan in the first nine months.

The second batch of special funds collected through bond issuance is being injected into infrastructure construction projects.