China Inflation May Let Wen Intensify Growth Efforts

China’s inflation eased to a 29-month low and Premier Wen Jiabao said the government will intensify its response to the economy’s slowdown as growth wanes in Asian neighbors from Japan to Vietnam.

The consumer price index (MXAP) rose 2.2 percent in June from a year earlier, the government said today in Beijing. Japan’s May machinery orders fell the most since 2001, while Hong Kong and Vietnam signaled growth may fall short of official forecasts.
Nomura Holdings Inc. said China will boost public investment and Credit Agricole CIB forecast cuts in taxes and banks’ reserve requirements after Wen was reported as saying downward pressure on the economy is still “relatively large.” Asian nations are becoming increasingly dependent on China to drive growth as Europe’s deepening debt turmoil crimps exports and the U.S. labor market slows.

“Inflation is dead and growth is by far the main concern in Asia,” said Tim Condon, chief Asia economist at ING Financial Markets in Singapore, who previously worked at the World Bank.

The MSCI Asia Pacific Index of stocks fell 1.4 percent at 4:14 p.m. in Tokyo, set for the biggest drop in a month. The gauge has declined about 15 percent in the past year. China’s benchmark Shanghai Composite Index dropped 2.4 percent, the largest decline since June 4.

China’s inflation compared with the 2.3 percent median estimate in a Bloomberg News survey of 32 analysts. Producer prices dropped 2.1 percent, versus the median forecast for a 2 percent fall. Consumer-price gains have now stayed below Wen’s 4 percent target for five months.
Rate Reduction

The government lowered benchmark interest rates on July 5 for the second time in a month, adding to the first reduction since 2008 and three cuts in banks’ reserve requirements starting in November. At the same time, Wen said officials will “unswervingly” continue property controls and prevent home prices from rebounding, the official Xinhua News Agency reported yesterday.

China will probably make one more quarter-point cut in interest rates this year and two more half-point reductions in the reserve-requirement ratio, according to median estimates in Bloomberg News surveys conducted July 5-9.

Japan today reported a current-account surplus that was the smallest for the month of May since at least 1985, while machinery orders, an indicator of capital spending, fell 14.8 percent in May from the previous month.
Forecast Revision

Hong Kong may revise its 2012 economic forecast next month, Financial Secretary John Tsang said on July 7. In Vietnam, Deputy Prime Minister Vu Van Ninh said the country may miss its growth target and the central bank told lenders to cut borrowing costs on existing loans to help businesses.

The latest reading on the U.S. economy will come via consumer credit data to be released today. German exports rebounded more than economists forecast in May, helping Europe’s largest economy to weather the sovereign debt crisis.

China’s economy may have expanded 7.7 percent in the second quarter from a year earlier, down from 8.1 percent in the prior three months, analysts estimated ahead of government data due July 13.

Today’s reports showed the CPI in June fell 0.6 percent from May, the biggest drop in two years, while producer prices declined 0.7 percent from the previous month.

The data “show that deflation could become a larger concern for China than inflation,” Ren Xianfang, a Beijing- based economist with IHS Global Insight Ltd., said in a research note. “While an economy-wide generalized deflation is yet to be seen, the deflationary spiral looks to have started in some industrial sectors, attesting to considerable stress with the economy.”
Food Disinflation

Food, which accounts for about a third of the consumer- price basket, rose 3.8 percent from a year earlier, the least in 2 1/2 years and down from 14.8 percent in July 2011.

The inflation slowdown reflects in part a decline in commodity prices. The S&P GSCI Spot Index of 24 raw materials has dropped about 11 percent in the past year.

The last time consumer-price increases slowed to this level in 2008, the People’s Bank of China was in the midst of five lending-rate cuts totaling 216 basis points.

Today’s report “should provide room for another rate cut” later in the quarter if the government wants to, said Wang Tao, chief China economist for UBS AG in Hong Kong.

Last week’s action by the central bank reduced the one-year lending rate by 31 basis points to 6 percent and one-year deposit rate by 25 basis points to 3 percent. The nation moved in tandem with the European Central Bank and the Bank of England, which also boosted monetary stimulus to support growth.
Wider Discount

The PBOC also allowed banks to offer loans at as much as 30 percent less than the benchmark rate, the second widening of the range in a month.

United Technologies Corp. (UTX), the Hartford, Connecticut-based maker of Otis elevators, has seen “significant slowdowns” in China, mainly in the Otis business, in part because of the government’s efforts to restrain the property market, Chief Financial Officer Greg Hayes said at a conference on June 14, according to a transcript.

Prices in eastern provinces are down about 20 percent in the residential market and residential property accounts for about two-thirds of Otis’s market in China, he said.

China Petroleum & Chemical Corp. (386) and PetroChina Co. (857), the nation’s biggest refiners, face more losses from processing crude after the government cut fuel prices last month by the most since 2008 as global oil costs tumbled.

Separate data today showed China’s benchmark price for power-station coal fell for a ninth week, the longest period of losses since at least 2008, as slowing economic growth and increased use of hydropower crimped electricity demand.