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China inflation in line; unlikely to impact policy

China's annual consumer inflation sped up in June, but wholesale prices remained entrenched in deflation, data on Wednesday showed.

The June consumer price index rose 2.3 percent from the year ago period, compared with a Reuters forecast of a 2.4 percent increase after a 2.5 percent rise in May.

Producer prices meanwhile fell 1.1 percent on an annual basis, versus the 1 percent drop a Reuters poll was expecting and following a decline of 1.4 percent in the previous month.

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Chinese stocks extended losses on the news, with the Shanghai Composite index falling 0.3 percent in early trading.

"What's reflected here is no big surprise," said Medha Samant, investment director of Asian equities at Fidelity Worldwide Investment.

"Food prices which make up big chunk of the CPI basket have been stable in china. Yes, they are at times volatile, especially during festival times but they sort of trend at this slight inflationary level depending on demand, so we are well within expectations," he added.

Lorraine Boogich | iStock / 360 | Getty Images

Bill Adams, economist at PNC Financial Services Group, agrees the benign inflation figures are largely within forecast and bodes well for consumers.

"Low inflation is good news for Chinese consumption growth,since it preserves the purchasing value of consumers' disposableincome," he said.

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Adams doesn't see the data impacting macro policy, as there are other more pertinent factors at play in swaying policy decisions.

"While inflation in China is well controlled in 2014, it has much less salience for macro policy than in years past. Inflation is no longer the binding constraint on credit growth in China; instead, financial stability risk is," he said.

Beijing is trying to stem excessive borrowing by local governments and control the rapid growth of shadow banking, which have spurred fears of a credit crisis. At the same time, policy makers are injecting a drip feed of mini stimulus to support economic growth, which slowed to 7.4 percent in the first quarter of the year.

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"This is not to say that China's macro policy is tight in 2014, on the contrary: China's June credit data, which we expect to show loan growth considerably outpacing nominal GDP growth, will show that its government continues to prioritize growth over financial stability," Adams noted.

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