China inflation data shows central bank policy dilemma

BEIJING Thu May 9, 2013 3:35pm BST

1 of 2. A woman chooses vegetables at a supermarket in Beijing May 9, 2013.

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BEIJING (Reuters) - China's annual consumer inflation accelerated more than expected in April while factory prices fell for a 14th consecutive month, highlighting the dilemma facing the central bank as it balances support for the economy against the threat of rising prices.

With global growth sputtering, China's central bank has limited room to move, unlike counterparts in South Korea and Australia which both made surprise rate cuts this week.

Any easing could fuel property market risks, while tightening would hurt a nascent recovery after economic growth unexpectedly slowed to 7.7 percent in the first quarter from 7.9 percent in the previous three months. .

Instead the onus may be on the government to push structural reforms to help sustain long term growth in the world's second largest economy.

"We cannot rely too much on the central bank to support the economy," said Xu Hongcai, senior economist at China Centre for International Exchange (CCIEE), a top government think-tank in Beijing.

The government will instead rely on fiscal policy by boosting infrastructure investment and cutting taxes to underpin the economy, said Xu, a former central bank researcher.

The People's Bank of China said on Thursday that it will increase policy flexibility to support the economy, stressing the need to ward off inflationary risks even through the country's economic recovery remained tepid.

"We must stay committed to improve the quality of our economic growth, continue to implement prudent monetary policy, and make policies more pre-emptive, targeted and flexible," the central bank said in a quarterly policy report.

"The foundation for stable economic growth is not solid yet and the intrinsic driver for growth has yet to be strengthened."

Indeed, any investors betting on easing could be disappointed after the central bank's sale on Thursday of 10 billion yuan (1.05 billion pounds) of three-month bills, the first time since 2011 it has done this.

The move suggested the central bank will rely on other tools.

Tightening, meanwhile, is unlikely given a series of factory and services PMIs issued earlier this month that signalled tepid economic activity in April.

OVERCAPACITY

Chinese factories are saddled with excess capacity due to weak demand, putting downward pressure on producer prices that in turn erodes their profits.

"On policy, the priority now is industrial reform to tackle the problem of excess capacity. As such, the focus will be shifted away from macro policy to micro policy. We expect the monetary policy to remain intact this year," said Dongming Xie, China economist at OCBC Bank in China.

The National Bureau of Statistics said that China's producer prices dropped 2.6 percent in April, the 14th consecutive month of year-on-year declines and sharper than a drop of 1.9 percent in March.

China's biggest listed steelmaker, Baoshan Iron & Steel (600019.SS), said on Thursday it would cut its main steel product prices for June bookings, its first reduction in nine months, underscoring demand worries amid a fragile economic recovery.

The firm, known as Baosteel, usually sets the tone for pricing by the rest of China's steel sector, which is currently gripped by a supply glut due to less than expected demand.

CONSUMER PRICES TICK UP

Consumer inflation quickened to 2.4 percent in April from March's 2.1 percent due to higher food costs, data from the National Bureau of Statistics, showed on Thursday.

Economists polled by Reuters had forecast April inflation to quicken to 2.3 percent and factory gate prices to fall 2.3 percent from a year earlier.

Food prices rose 4.0 percent in April from a earlier, quickening from the 2.7 percent rise in March.

"Rising vegetable prices were the main factor pushing up the CPI," Yu Qiumei, a senior statistician at the statistics bureau, said in a statement accompanying the data, noting bad weather and lower rainfall had reduced supplies.

The central bank sounded a cautious note on price rises. ""Prices are now sensitive to any rise in demand. We must guide and stabilize inflationary expectations preemptively," it said.

Consumer inflation may quicken to around 3 percent in May, partly because of the base effect, said Zhou Hao, China economist at ANZ in Shanghai.

But he added that the central bank is widely expected to keep policy broadly neutral with some fine-tuning to support the economy amid the global uncertainties.

"Monetary policy is likely to stay relatively accommodative as China's economic recovery remains fragile."

(Additional reporting by Langi Chiang, Editing by Simon Cameron-Moore and Sanjeev Miglani)

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