China's inflation tumbles to lowest since September 2010

China's industrial output growth dropped in November to its slowest pace in more than two years and inflation tumbled as economic conditions deteriorated, raising expectations that Beijing will pursue a more pro-growth policy to support jobs.
Easing inflation pressure on consumers at the same time as data signals a serious risk of a sharp industrial slowdown is potentially perilous for policymakers trying to engineer a soft economic landing against a backdrop of a deepening crisis in China's main export market - debt-ridden Europe.
"The sharp contraction in the real economy, the external uncertainties lingering on, plus the easing inflationary pressure all point to a larger scope for further policy easing. So the basic tone of the macro policy will lean towards the pro-growth side," said Nie Wen, analyst at Hwabao Trust in Shanghai.
A deluge of data on Friday showed China's annual consumer inflation rate tumbled in November to 4.2 percent, the lowest level since September 2010 and slightly below expectations. It was the first time since February it had fallen below 5 percent. Inflation has dropped from a three-year high of 6.5 percent in July, allowing Beijing to shift its policy stance towards offering support for the economy, especially as CPI is now closer to the full-year government target for 2011 of 4 percent.
But it was an eye-watering collapse in producer price inflation - down to just 2.7 percent in November, roughly half the rate of October and in outright deflationary territory month-on-month - that has many economists anticipating a shift to a more explicit pro-growth policy.
Industrial output growth slowed sharply to 12.4 percent in November from 13.2 percent in October. The outcome was below expectations and marked the weakest pace since August 2009 during the global financial crisis, Reuters data shows, a worrying sign for the sector at the centre of China's export engine. Factory activity, in fact, contracted in November from October, China's official purchasing managers' index (PMI) showed last week.
"The risks (of a hard landing) are clearly there," said Stephen Green, an economist at Standard Chartered Bank in Hong Kong. Retail sales in November meanwhile rose 17.3 percent from a year earlier, slightly outpacing October's 17.2 percent and confounding economists forecasting a slowdown to 16.9 percent.
For most of 2011, Beijing has been preoccupied with beating down inflation. Even with the sharp fall in November, inflation has averaged 5.5 percent so far this year, well above the government's target, so the government will be wary of tilting policy too far towards loosening.
But they have offered more support to small businesses as signs of the economic slow down increased and signalled a further shift to a loosening policy on November 30 by cutting bank reserve requirements for the first time in three years. Now analysts expect a further subtle shift of emphasis to supporting industry by protecting against lost jobs instead of lost consumer spending power, showing Beijing's obsession with social stability remains at the heart of policy. Xinhua news agency said on Friday that the Communist Party's top leaders would maintain a "pro-active" fiscal policy in 2012. Reflecting Beijing's wariness about reawakening the inflation dragon, monetary policy would remain "prudent", Xinhua said.