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Inflation in China grows at weakest pace in 30 months

Consumer prices in China grew 1.8% in July compared with a year earlier, down from 2.2% annual growth in June.

August 09, 2012|By David Pierson, Los Angeles Times

BEIJING — Inflation in China grew at its weakest pace in 30 months in July, giving the government further room to loosen monetary policy at a time when the country is facing its sharpest economic slowdown in years.

Consumer prices grew 1.8% compared with a year earlier, according to China's National Bureau of Statistics, down from 2.2% annual growth in June.

China now faces the risk of seeing prices across the country fall, diminishing profits.

"Deflation, not inflation, is the greatest short-term threat to the Chinese economy," said Alistair Thornton, a Beijing-based economist for IHS Global Insight, on Thursday.

Policymakers can opt to ease more money into the economy through its state banks to boost growth. China already cut interest rates in June and July and has reduced the ratio of capital that banks must hold in reserve several times since late last year.

A sharp decline in export orders from Europe and a sluggish domestic property market helped slow economic growth in China to 7.6% in the second quarter, its weakest expansion since the 2008 financial crisis.

Chinese leaders have pledged to fine-tune policy to buoy an economy increasingly showing signs of pressure.

Bankruptcies are reportedly rising among manufacturers in the export-oriented eastern coastal regions. Foreign corporations, such as Caterpillar Inc., not only reported weaker earnings but also said they have had to export machinery built in their Chinese factories and intended for the domestic market.

"Although the economy has probably bottomed, it remains generally weak," said Wang Tao, an economist for UBS. "This, together with lower inflation, argues for continued policy support."

China's central bank warned that inflation could rebound after August, especially with more easing of monetary policy. A severe drought in the U.S. is also pushing up global grain prices.

That could result in higher food costs in China, the world's largest importer of soybeans. The vegetable is used to make cooking oil and to feed China's growing population of livestock.

"Inflation will not recede forever, as the [central bank] has indeed warned, with recent fears centered around the knock-on effects of climbing soybean prices," Thornton said. "Increases in soybean prices mean not only more expensive cooking oil, but also more expensive pork."

Still, economists say there is little chance this year that China will experience the runaway inflation it saw in July 2011. Back then, aggressive stimulus policies pushed consumer price growth up to a three-year high of 6.5%.

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