China Slips Deeper Into Deflation; Analysts Relaxed

China fell deeper into deflation in April, but economists said the central bank was unlikely to shift policy as a result and expressed confidence that prices would be rising again before the end of the year.

Consumer prices fell 1.5 percent in the year to April, marking the third consecutive month of deflation after a 1.2 percent fall in the 12 months to March, the National Bureau of Statistics said on Monday.

Factory gate prices fell 6.6 percent in the year to April, the rate of decline accelerating from a 6.0 percent drop in the 12 months to March.

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Both falls were one-tenth of a percentage point deeper than markets had expected, but economists said the declines simply reflected a correction to spikes a year ago in the cost of food and other commodities.

"Inflation is likely to remain in negative territory for the next few months until the base effect of high prices last year fade away, but further ahead we expect inflationary pressures to resume in response to accommodative monetary policy, strong fiscal stimulus and aggressive bank lending," said Brian Jackson, an economist at Royal Bank of Canada in Hong Kong.

The People's Bank of China cut interest rates aggressively in the final months of 2008 to complement a 4 trillion yuan ($585 billion) stimulus package aimed at propping up an economy that was slumping in response to a collapse in
global demand.

With an array of indicators suggesting that growth is gradually recovering, fewer and fewer economists expect further reductions in borrowing costs, especially because bank lending has boomed in the first four months of the year.

"The central bank is unlikely to move on this pair of figures. We don't think the central bank is going to cut interest rates any time soon," said Tang Jianwei, an analyst with Bank of Communications in Shanghai.

Not As Bad As It Looks

In April alone, consumer prices fell 0.2 percent, following a 0.3 percent drop in March, the statistics bureau said.

"Deflationary pressure is not as severe as it looks. With the economy recovering, price changes will be back into positive territory in the second half," Tang said.

Nie Wen with Fortune Trust in Shanghai agreed. "I don't think the central bank will make major adjustments to monetary policy to combat deflation in the near term. Economic recovery is the broad consensus now."

That prospect supported prices on the Shanghai stock exchange, where the main index was up 0.9 percent in late morning.

Some analysts are already wondering when, instead of worrying about deflation, the central bank's thoughts will turn to inflation, given the extraordinary stimulus injected into the economy.

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Jiang Chao, an analyst at Guotai Junan Securities in Shanghai, ruled out further rate cuts and said he expected inflation to average 2 to 3 percent next year.

Jing Ulrich, chairman of China equities at J.P. Morgan in Hong Kong, agreed that strong money supply growth could give rise to inflationary pressure down the road.

"However, a change in the monetary policy stance is unlikely to begin until policymakers are confident that the economy is on a clear course of recovery,"
she said in a report to clients.

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