China inflation eases, further stimulus 'likely'

China's inflation eased to 3.0 percent in May as other data released on Saturday indicated a slowdown in the world's second largest economy, giving Beijing more room to ease monetary policy to stimulate growth.

It was the lowest rise in the consumer price index since June 2010, and below market expectations for a 3.2 percent rise, according to a poll of 15 economists by Dow Jones Newswires.

Meanwhile industrial output grew at a slower-than-expected 9.6 percent year-on-year in May, a faster clip than the previous month but still near three-year-lows.

"The combination of falling inflation and weak industrial data will provide more room for the authorities to loosen policy," Goldman Sachs economist Yu Song told Dow Jones Newswires.

"There will remain room for the People's Bank of China to further cut the (bank) required reserve ratio and interest rates."

While production from the country's millions of factories and workshops was stronger than the 9.3 percent expansion seen in April, it was still lower than forecasts of a 9.9 percent gain in a Dow Jones Newswires poll of 14 economists.

Chinese exporters have been particularly hard hit by the crisis in Europe, their largest market.

In the first four months of 2012, Chinese exports grew just 6.9 percent, against 20.3 percent last year and 31.3 percent in 2010.

According to HSBC, Chinese manufacturing activity contracted in May for the seventh consecutive month.

Faced with these weak figures, Premier Wen Jiabao last month said greater priority should be given to growth, which slowed to 8.1 percent in the first quarter of 2012 year-on-year, its slowest pace in nearly three years.

Hoping to spur growth, Beijing slashed interest rates by 25 basis points on Thursday -- its first cut in more than three years -- and moved to allow rates to float more freely.

China has also cut bank reserve requirements three times since December as policymakers aim to boost lending to help growth.

Analysts said the moves sent a strong message that China is willing to ease monetary policy to shore up expansion in the Asian powerhouse, which has played a key role in supporting the global economy in the current downturn.

Alistair Thornton, Beijing-based China economist for IHS Global Insight, told AFP that further stimulus was likely in the coming months.

"Growth in China is slowing rapidly, as price pressures continue to come off. That should act as a spur for government policy to combat the slowdown," he said.

"We think it is very likely that there will be another interest cut through the rest of the year," while there was "clearly a lot more room" for cuts in bank reserve ratio requirements.

China has set itself a target of keeping annual inflation within four percent this year, fearing that surging prices carry the potential to cause social unrest as people grumble about paying more.

But easing inflation should give the government more room to ease monetary policy to stimulate growth.

"Inflation is easing as expected, or easing even faster than expected, which is mainly due to economic weakening not only in China, but also around the world," said UBS economist Wang Tao.

The disappointing figures came as Beijing seeks to boost economic growth to avoid a hard landing in the world's second largest economy, with other data showing falling infrastructure investment and a slowdown in consumer spending.

"The turning point hasn't come yet. Economic growth is still declining," Citigroup economist Shuang Ding told Dow Jones Newswires.

The producer price index, which measures the cost of goods at the farm and factory gate and is an indicator of future consumer prices, slipped 1.4 percent in May year-on-year, a sharper fall than April's 0.7 percent slide.

Meanwhile, the government said urban fixed asset investment rose 20.1 percent in the first five months of 2012 on-year, weakening from 20.2 percent in the first four months and 20.9 percent in the first three.

Fixed asset investment in the cities is a key gauge of government infrastructure spending, which has increased rapidly in recent years as Beijing has sought to cushion the impact of the global downturn.

Retail sales rose 13.8 percent year-on-year in May, compared with a 14.1 percent rise in April and 15.2 percent in March.

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