August 9, 2013 / 3:09 AM / in 4 years

China July inflation steady, policy seen neutral

BEIJING (Reuters) - China’s consumer inflation steadied in July although factory-gate deflation persisted for a 17th month, official data showed on Friday, pointing to monetary policy on hold as Beijing tries to arrest a slowdown that has run for more than two years.

A worker rides his bicycle past piles of steel coils for export at a port in Yingkou, Liaoning province August 9, 2013. REUTERS/Stringer

The data came a day after surprisingly strong trade figures, and analysts said while the world’s second-largest economy may be showing signs of stabilizing it was too early to conclude it had started to turn around.

The central bank was hawkish on inflation in a report published last week, and so the data is unlikely to lead to a change in its policy rates despite calls from some economists for a rate cut to help struggling companies.

The National Bureau of Statistics said consumer prices rose an annual 2.7 percent last month, the same as in June. Producer prices fell 2.3 percent from a year earlier, narrowing from a fall of 2.7 percent in June.

Economists polled by Reuters had expected consumer inflation of 2.8 percent and factory-gate prices to fall 2.2 percent.

“I still advocate a cut in interest rates to help companies as factory-gate deflation persists,” said Jianguang Shen, chief China economist with Mizuho Securities Asia in Hong Kong.

“But the central bank remains hawkish on inflation and might need more evidence as it is worried that a rate cut would be taken by the markets as a sign of stimulus.”

Consumer prices were up 0.1 percent in July from June.

China has rolled out a number of measures since mid-year to help small firms and exporters as officials try to generate momentum in economy that has slowed in nine of the past 10 quarters, though large-scale stimulus has been ruled out.

Top leaders in Beijing have said they will accept a slowdown as they rebalance the economy to become more consumption-driven, but have indicated that annual growth should not be allowed to slip below 7 percent.

RECOVERY

The slowdown in the rate of deflation was taken as further evidence of a possible stabilization of the economy, with analysts looking to data later in the day on investment and industrial output for more signs of a bottoming out in activity.

“The easing PPI drop also implies signs of stabilizing of the industrial sector,” said Xu Dongshi, an economist at Galaxy Securities in Beijing.

“But it’s still too early to say that China’s economy is on the track of rebounding, as it takes time to resolve economic structural problems,” he added.

Thursday’s trade data showed exports rose 5.1 percent in July from a year ago, a smart turnaround from their first fall in 17 months in June, and imports jumped 10.9 percent as China shipped home record amounts of commodities.

The trade figures were seen as a positive precursor for industrial output, with economists expecting production to show an annual rise of 9 percent in July.

Fixed asset investment is forecast to have risen 20 percent in the first seven months of the year, in line with growth in the first six months.

“Data this afternoon will show more signs of stabilization in the economy. We need August data to confirm a recovery,” said Mizuho’s Shen.

Reporting by China Economics Team; Editing by John Mair

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