China Wholesale Inflation Slides, Rate Cut Looms

China's wholesale price inflation tumbled in October, clearing the way for the central bank to cut rates at any time to support a massive stimulus package aimed at shoring up the world's fourth-largest economy.

China, Chinese Flag
China, Chinese Flag

Producer price inflation fell to 6.6 percent in the year to October from September's reading of 9.1 percent, the National Bureau of Statistics said on Monday.

Economists polled by Reuters had expected a rate of 8.0 percent. Consumer inflation figures for October, due on Tuesday, are likely to confirm that price pressures are rapidly fading as energy and commodity costs slide and domestic demand weakens in response to the global economic downturn.

Ken Peng, an economist with Citigroup in Shanghai, said the drop in factory-gate inflation, which peaked at 10.1 percent in August, provided policy makers with more flexibility.

Consumer inflation is forecast to come in at 4.2 percent, well below a near 12-year peak of 8.7 percent in February.

"Monetary policy is completely free to act to counter to any downside risks. It's still necessary for monetary policy to complement the fiscal package," Peng said.

He was referring to a 4 trillion yuan ($586 billion) stimulus plan unveiled on Sunday targeted at sectors including infrastructure, health care, education and environmental protection.

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It was unclear how much of the package represents new spending, but the Shanghai stock market took heart from the announcement, with the main index up 5 percent in late morning trade.

"The big stimulus plan just announced is a clear move to avoid a cycle of deflation and recession," said Ma Xiaoping, an economist with HSBC in Beijing. "The price issue is no longer a problem for China's leadership, and the State Council is focusing wholeheartedly on growth," she said.

The State Council, China's cabinet, accompanied the pump-priming plan with an announcement that the stance of monetary policy had shifted to "moderately easy" from "tight".

Zhou Xiaochuan, governor of the central bank, which has already cut interest rates three times since mid-September, said the policy change would mean faster money growth and lower borrowing costs.

Speaking in Brazil, Zhou also described the recent drop in inflation as remarkable.

"The next interest rate cut may come at the end of this month or in early December," said Li Huiyong, chief analyst at Shenyin & Wanguo Securities in Shanghai.