China’s industrial output growth eased much more than expected in April to suggest the world’s second-biggest economy is cooling, reducing the need for further aggressive monetary policy tightening even as inflation remains stubbornly high. Consumer inflation eased modestly to 5.3 percent in April from a 32-month high in March of 5.4 percent. The outcome topped expectations but still underlined the view that price pressures are peaking and may start to ease in the second half of 2011. Industrial output rose 13.4 percent from a year earlier, but that was more than a full percentage point below both expectations and a strong pace in March.
Retail sales growth eased more than expected while annual increases in money supply and outstanding yuan loans hit their lowest pace in 29 months, signs that measures to slow the economy are starting to bite. Most analysts said the central bank could now reduce the scope of further tightening in monetary policy, while a prominent Chinese government economist went further, saying policymakers may be concerned about an overly rapid slowdown. “The central bank will be very cautious about raising interest rates,” said Wang Jian, a researcher with the National Development and Reform Commission. Other analysts were not so sure.
The central bank is approaching the end of a monetary tightening cycle after four rates rises since October, and seven increases in bank reserve requirements to a record 20.5 percent for big banks, they said. But some more tightening would be needed, they said. “The April economic indicators make it less likely that the central bank will raise required reserve ratios or interest rates. I believe the central bank will, at most, raise reserve requirements once in the coming two months,” said Shao Yu, an economist with Hongyuan Securities in Shanghai. The world’s fastest-growing economy expanded more than 10 percent last year as it emerged strongly from the global financial crisis.
Policymakers, targeting four percent average inflation this year, have declared tackling inflation their top priority for this year after high food prices raised fears of broader inflation that could derail the recovery or even spark social unrest. Food prices fell 0.4 percent in April from March but were 11.5 percent higher than a year earlier. Non-food prices rose 0.4 percent in April from March. Analysts have said that falling food prices point to an easing of overall inflationary pressures. Overall inflation may still rise through mid-year – partly to reflect a low comparative base in 2010 – but it would ease in the second half of the year.
“The data suggests that previous measures to get a grip on lending and growth have had an impact,” said George Worthington, chief Asia economist, IFR Markets, a unit of Thomson Reuters, in Sydney.Figures from the National Bureau of Statistics showed that output growth in all major industries slowed down in the year through April. Growth in output of most major products also slowed down, including cement, although the pace of crude and cast iron production picked up. Analysts said industrial output was partly reined in by supply constraints in electricity, but still showed the economy was cooling.
The slowdown “reflects progressing weakness in final demand as tightening measures start to bite,” IHS Global Insight said in Beijing. “A hard-landing scenario is still a low probability, though,” economists Xianfang Ren and Alistair Thornton said in a note.
