Downward inflation forecast, room for policy maneuver

July 3, 2012
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, BEIJING, July 3 — China’s June inflation, when confirmed later this month, is expected to show a drop to below 3 percent, maybe even as low as 2.5 percent, leaving room for authorities to facilitate monetary policies to boost growth, experts have forecast.

The Bank of Communications predicted that June’s consumer price index (CPI), the main gauge of inflation, may continue to see a visible drop to around 2.4 percent, the Xinhua-run Economic Information Daily reported on Tuesday, citing Tang Jianwei, a senior analyst at the banks.

An estimate by the Haitong Securities Co. Ltd. put the June CPI at 2.3 percent, noting that falling commodity prices will further bring down non-food prices, and the fuel price cut last month will also reduce prices of related goods and services.

According to data from the Ministry of Commerce, produce prices continued a downward trend in general in June. Vegetable prices had dropped for the seventh week as of June 24 as supplies increased. Meanwhile, prices of production materials including energies, rubber, steel and chemical products also declined for the 10th week as of June 24.

China’s inflation unexpectedly eased to a 17-month low of 3 percent in May, enhancing evidence supporting the government’s policy shift to shore up growth. It weakened from April’s 3.4 percent and 3.6 percent in March.
Most financial organizations predict the CPI will probably stay below 3 percent until at least the end of the third quarter of 2012.

“The decelerating inflation is good news. It will give more leverage to authorities to manoeuvre monetary policies. We predict the central bank may very soon cut banks’ reserve requirement ratio (RRR) again,” said Qu Hongbin, chief economist at HSBC China.

The central bank has dropped banks’ RRR twice this year and cut the benchmark interest rate by 25 basis points last month, as the world’s second-largest economy slows due to weak external demand and its government’s ongoing measures to cool the real estate market.

Official data showed the country’s manufacturing sector grew at its slowest pace in seven months in June, with the purchasing managers index (PMI) for the sector easing further to 50.2 percent, barely above the boom-bust line of 50 percent.

Globally, the eurozone manufacturing PMI stood at 45.1 percent in June, its lowest since June 2009, according to data from financial information provider Markit. Meanwhile, the U.S. manufacturing sector shrank in June for the first time since July 2009, with the U.S. Institute of Supply Management manufacturing index dropping to 49.7 percent in June, down from 53.5 percent in May.

The Chinese central government pledged last month that it will prioritize stabilizing economic growth, warning that the economy faces “increasing downward pressure.” The nation’s gross domestic product (GDP) expanded at an annual rate of 8.1 percent in the first quarter of 2012, the slowest pace in almost three years.

The National Bureau of Statistics is scheduled to release new CPI figures on July 9 and the GDP figure for the second quarter on July 13. Market estimates have put the latter at around 7.8 percent.

Qu Hongbin said the economy may slide further as external demand remains weak and domestic demand has not improved significantly. He forecast the central bank will resort to open-market operations and may cut the RRR by another 200 basis points in the rest of the year to inject liquidity to the market.

Economists have also underscored the possibility of fresh cuts to the interest rate. “Considering inflation is likely to run at low levels from June to October, we think another rate cut is possible,” said Zhong Wei, a finance researcher at the Beijing Normal University.

Cao Yuanzheng, chief economist at the Bank of China, echoed the view, saying the need to stabilize growth and address the financing difficulties of the nation’s small and medium-sized companies will determine the necessity of a new rate cut.

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