SHARP FALL IN CHINESE INFLATION SHIFTS FOCUS TO GROWTH PROSPECTS

tauringhuang.

China's inflation rate dropped sharply in August for a fourth month, giving policymakers who have been focused on battling rising prices for the past year more room to boost the economy if growth begins to slow sharply.

Consumer price inflation dropped from 6.3 per cent in July and a peak of 8.7 per cent in February to 4.9 per cent last month. The figure, which was well below analysts' forecasts, was the lowest since June 2007.

Although factory price inflation nudged up further to 10.1 per cent last month from 10 per cent in July, economists said the new figures showed that China was close to overcoming a spike in consumer prices that had led the government to impose tough controls on bank credit.

Chinese authorities have used tighter monetary policy to try to engineer a gradual slowdown in the economy, which was growing at an annualised rate of nearly 12 per cent at the end of last year. However an increasing number of voices in Beijing are suggesting the measures have gone too far and are calling for new policies to boost growth.

Policy shifts under discussion include a further relaxation of the quotas on lending by commercial banks and increases in public spending.

“There are increasing noises that this tightening policy has lasted too long, and more and more worries about growth skidding seriously,” said Stephen Green, economist at Standard Chartered, who predicts growth will drop to 8.6 per cent in 2009, from 10.1 per cent in the second quarter of 2008.

The drop in consumer inflation also gives the authorities more space to increase energy prices, which are well below those in many developed countries.

Other government statistics released yesterday indicated a softening in economic activity, although they did not suggest a decline in growth.