China inflation, output create room for pro-growth steps

Wed Nov 9, 2011 7:06am EST
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By Nick Edwards and Langi Chiang

BEIJING (Reuters) - Chinese industrial output grew at its weakest annual pace in a year in October and inflation fell sharply, raising expectations Beijing will do more to support economic growth by "fine tuning" policy.

A flurry of data on Wednesday showed that China's factories are bearing the brunt of a modest economic slowdown even as consumer spending and investment in assets such as roads and other infrastructure remain resilient.

China's annual inflation rate fell to 5.5 percent in October from September's 6.1 percent -- the biggest drop in the annual rate from one month to the next since February 2009 -- and a further pullback from July's three-year peak of 6.5 percent.

Premier Wen Jiabao said prices had fallen further since October, adding to the view that the State Council will start to favor more pro-growth policies, although inflation is still too high to expect a quick cut in interest rates from the People's Bank of China (PBOC).

"All of this suggests that the balance of risk for the PBOC and State Council is likely shifting to growth and away from inflation," Tim Condon, head of Asian economic research at ING in Singapore, said.

"I don't have any (easing) in my forecast horizon. A required reserve ratio cut is a possibility, but I expect that they would continue with these fine-tuning measures."

A senior official from the country's top economic planning agency signaled caution ahead, saying inflation was likely to stay high in coming months.

China's leaders have begun talking in recent weeks about "fine tuning" macroeconomic policy to maintain economic growth, which slowed in the third quarter to 9.1 percent, its weakest in more than two years.   Continued...

<p>Customers inspect washing machines at a supermarket in Wuhan, Hubei province November 8, 2011. REUTERS/Stringer</p>