June 5, 2012 / 8:24 AM / 5 years ago

China May inflation to cool, output seen near three-year lows

A vegetable seller waits for customers in her stall at a market in central Beijing June 1, 2012.David Gray

BEIJING (Reuters) - Chinese inflation is expected to have cooled further in May and factory output growth is set to come in not far from three-year lows, Reuters polls show, as calls grow for China to take more action to fight its worst economic slowdown in three years.

Analysts forecast annual consumer price inflation to have retreated to 3.2 percent in May from 3.4 percent in April, comfortably within the government's 2012 target of 4 percent.

They say sedate inflation gives China room to relax monetary policy and shield its economy from bigger headwinds from Europe's debt crisis.

"Lower inflation from May onwards will likely open the window for interest rate cuts, which we expect to take place in June-July," Helen Qiao, managing director at Morgan Stanley, told Reuters.

Forecasts for factory price deflation, with the producer price index seen falling 1.1 percent in a third straight month of decline, are underpinning expectations for consumer inflation to stay benign.

China is set to release data for inflation, industrial output, retail sales and fixed asset investment on Saturday.

Europe's worsening debt problems are expected to have dragged Chinese factories into another month of relatively listless performance, with output rising just 9.9 percent in May from a year earlier, a shade above three-year lows of 9.3 percent hit in April.

Fixed asset investment, the second-biggest driver of China's economic growth after consumption in the first quarter, is seen languishing at a decade low of 20 percent, compared to April's 20.2 percent.

Retail sales are seen up 14.3 percent on the year, a whisker above April's 27-month low of 14.1 percent.

A raft of weak economic numbers would feed speculation that China is about to open it purse again to pay for another big fiscal stimulus package to boost growth, similar to its 2008/09 pump-priming deal that cost 4 trillion yuan.

But many analysts say such talk is unfounded and more wishful investor thinking than prescience, especially since China is still trying to unravel a debt mess left by the 2008/09 pump priming.

A Reuters poll in May showed analysts expect China to lower banks' reserve requirements by another 100 basis points this year. Economists were divided on whether Beijing would cut interest rates, with a slim majority calling for no change.

Reporting by Koh Gui Qing; Editing by Edwina Gibbs

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