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China's Window for Monetary Easing Closing Fast: Economists

Even as consumer prices in China rose at their slowest pace in 30 months in July, giving the central bank more scope to ease monetary policy, economists say policymakers will have to act real fast because the window for further rate cuts may be closing.

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China's annual inflation eased to 1.8 percent in July from June's 2.2 percent, official data showed on Thursday and producers’ price index fell 2.9 percent, but some economists warn that inflation is already showing signs of creeping up putting pressure on the central bank to ease policy soon.

“Room for policy easing is limited by the fact that July will likely be the bottom for consumer price index inflation in year-on-year terms, and producers’ price index deflation does not have much further to deepen,” said Dariusz Kowalczyk, Senior Economist at Credit Agricole in Hong Kong

Kowalczyk adds that month-on-month consumer prices have actually risen marginally, showing that demand is probably turning around and "we expect CPI inflation to rise from now on, reaching 3.8 percent at the year-end.”

Alistair Thornton, Economist with IHS Global Insight in Beijing, agrees that the Chinese government needs to act soon because while inflation is continuing to decelerate, it is unlikely to remain at low levels for long.

President Hu Jintao and Premier Wen Jiabao have promised to step up policy "fine tuning" in the second half of the year to support the economy.

“Authorities are no doubt aware that this is the time to act,” Thorton said. “Inflation will not recede forever, as the People’s Bank of China has indeed warned, with recent fears centered around the knock-on effects of climbing soy bean prices.”

Meanwhile, pork prices are due for a rebound because overproduction of hog this year is coming down, and will further fuel inflation, he said.

Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital Investors in Sydney, said he expects another cut in banks' reserve requirement ratio and in official interest rates “in the next month.”

“Quite clearly, below trend growth is resulting in falling inflation in China and this provides plenty of scope for further policy stimulus to boost Chinese economic growth in the months ahead,” he said.

China also released on Thursday data on industrial output, retail sales and fixed-asset investment, which came in lower than expectations. Investors were hoping for signs of a pick-up in China’s economic expansion which has been sliding since the beginning of 2011, reaching 7.6 percent in the second quarter. This is the weakest pace since the global financial crisis.

- By CNBC's Jean Chua.

Contact Asia Economy

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