China inflation below target as leaders start reform summit

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A street vendor displays a souvenir with pictures of Chinese President Xi Jinping (L) and the late Chinese Chairman Mao Zedong to visitors at the Tiananmen Square in Beijing November 8, 2013. Photo: Reuters

China's consumer prices rose less than economists forecast in October and factory-gate deflation deepened for the first time in five months, reducing odds that officials will tighten monetary policy.

The consumer price index rose 3.2 percent in October from a year earlier, the National Bureau of Statistics said today in Beijing, compared with the 3.3 percent median estimate in a Bloomberg News survey and September's 3.1 percent. Industrial-production growth unexpectedly accelerated to 10.3 percent, a separate report showed.

Inflation below the government's 3.5 percent full-year target may allow Communist Party leaders, gathering today in Beijing for an economic summit, to take a measured approach to reining in credit growth. State media have called the meeting a "watershed" for reform as China seeks to move to an economy focused on domestic demand.

"Both CPI inflation and economic growth still remain within Beijing policy makers' comfort zone," said Qu Hongbin, chief China economist at HSBC Holdings Plc in Hong Kong. While there's "no need for either easing or tightening in the coming months," the central bank will have to use its tools to keep liquidity stable as money inflows keep rising, Qu said.

The gain in factory output compares with a median estimate of 10 percent in a Bloomberg News survey and September's 10.2 percent pace. Retail sales rose 13.3 percent in October from a year earlier, the same pace as the previous month, while January-to-October fixed asset investment excluding rural areas expanded 20.1 percent, after a 20.2 percent rate in the first nine months, statistics bureau data showed.

Inflation estimates

The central bank is scheduled to release money supply and lending numbers by Nov. 15.

Price gains have stayed within the government's 2013 target of 3.5 percent every month this year. Estimates (CNCPIYOY) for October consumer inflation from 44 analysts ranged from 2.8 percent to 3.5 percent, according to the Bloomberg survey. The median estimate of 40 economists was for a 1.4 percent drop in producer prices.

Producer prices fell a more-than-projected 1.5 percent, after a 1.3 percent decline the previous month. It was the 20th straight month of declining factory-gate prices, the longest stretch since 2002. "As long as PPI inflation remains negative, there is little pass-through effect to CPI inflation," Liu Li-Gang and Zhou Hao, economists at Australia & New Zealand Banking Group Ltd., said in a note.

Food prices

The October CPI gain was the highest since February when the index also rose 3.2 percent. Food prices rose 6.5 percent from a year earlier, the most since April 2012, while non-food inflation was unchanged from September at 1.6 percent, according to today's data. Transportation and communications costs fell 0.6 percent, the most in four months.

Competition is helping keep consumer-price gains muted, as Chinese online shopping sites gear up for "Singles Day" sales on Nov. 11 by slashing prices. 360buy Jingdong Inc. began offering half-price Pampers diapers as of Nov. 1 and will slice as much as 70 percent off items including slimming belts and facial moisturizers, according to its website.

The benchmark seven-day repurchase rate climbed 85 basis points to 5.05 percent in October, helping derail a stock market rally and driving the one-year government bond yield to a record high. In June, the Shanghai Composite Index of shares sank 7.7 percent after the repo rate touched an all-time high of 10.77 percent.

Comfort zone

While inflation remains in a "comfortable zone," it has begun to "flag an alarm for the monetary authority to keep a close watch on the trend," Hu Yifan, chief economist at Haitong International Securities Group in Hong Kong, said in a note.

Yuan positions at Chinese financial institutions accumulated from foreign-exchange purchases, a gauge of capital inflows, rose in September by the most in five months, data showed last month.

Among other recent signs of potential tightening, the People's Bank of China said in a report this week that the economy "may see a decline in leverage" over a relatively long period of time, a suggestion that UBS AG said hadn't been previously mentioned by a government economic agency. The PBOC also said that "we can't be blindly optimistic about the price situation."

Meeting start

Leaders including President Xi Jinping and Premier Li Keqiang started a four-day gathering today, the third full meeting of the party's current Central Committee, to chart out China's long-term economic policies.

Li said in remarks published earlier this week that "there's a lot of money in the "˜pool' and issuing more money may lead to inflation," citing the nation's outstanding M2 money supply of more than 100 trillion yuan ($16 trillion) as of March, about double gross domestic product.

China's economic growth rebounded to 7.8 percent in the third quarter from 7.5 percent in the second quarter. Data yesterday showed China's exports increased a more-than-estimated 5.6 percent in October from a year earlier, rebounding from September's unexpected drop. Imports rose 7.6 percent, leaving a trade surplus of $31.1 billion, the biggest this year.

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