Chinese inflation hits 2½ year low

Chinese inflation dropped to its lowest in 2½ years and the price of goods leaving factory gates fell 3.3 per cent in January, raising the prospect that the country will experience falling prices in coming months.

Consumer price inflation fell for the ninth month in a row to 1 per cent in January from 1.2 per cent the previous month as prices for clothing, transport and housing tumbled. The drop in prices charged by manufacturers underscored the weakness of the economy.

Several economists forecast that consumer prices in China would begin to fall from this month. Ha Jiming, economist at China International Capital Corporation, said inflation would be -1 per cent in February and factory-gate prices would decline 6.3 per cent.

However, most analysts say China will avoid a prolonged period of deflation, which could lead to a sharp drop in output as consumers and companies delay spending, because of the aggressive monetary and fiscal stimulus policies introduced by the Chinese authorities.

The government has abandoned quotas for new credit growth and has urged state-owned commercial banks to help finance a Rmb4,000bn ($586bn) spending plan over two years.

State media reported this week that new loans issued in January reached Rmb1,200bn, which, if confirmed, would represent the third month in a row of sharply higher credit expansion. Economists expect the Chinese central bank, which has cut interest rates five times since September, to ease monetary policy further.

“The latest data confirm that the free fall in upstream prices is bringing rapid disinflation at the consumer level,” said Qing Wang, economist at Morgan Stanley.