China Consumer Inflation Falls To 30-month Low

BEIJING (Reuters) - China's annual consumer inflation fell to a 30-month low in July, suggesting that the central bank has scope to ease policy further after rate cuts in June and July to keep the economy on track to meet an official 2012 growth target of 7.5 percent.

The government is on track to ease policy to cushion the impact of global headwinds on the world's second-largest economy, but needs to tread cautiously to avoid reigniting property sector risks and fuelling renewed consumer price rises.

Annual consumer inflation eased to 1.8 percent in July from 2.2 percent in June, pulling back further from a three-year high last July of 6.5 percent, official data released on Thursday showed. Economists polled by Reuters had forecast inflation to ease to 1.7 percent in July.

"This number gives more room for policy easing," said Zhang Zhiwei, chief China economist at Nomura in Hong Kong.

"It is now pretty clear that CPI will likely be below the official 4 percent target for the year, so the policy focus for the government can stay clearly on growth."

Hopes of further easing from China boosted riskier assets, with Asian shares rising to a three-month high and the commodity-sensitive Australian dollar testing a 4-1/2-month peak.

Consumer prices edged up 0.1 percent in July from the previous month, compared to expectations of a 0.1 percent drop.

Still, there is little sign of inflationary pressures coming from factories. July's data showed that producer prices fell in July by 2.9 percent from a year earlier, a sharper decline than the 2.5 percent forecast and the steepest fall since October 2009.

It marked a fifth straight month of falling producer prices, reflecting the pressures eating into corporate earnings and capping capital spending.

President Hu Jintao and Premier Wen Jiabao have promised to step up policy "fine tuning" in the second half of the year to support the economy.

Apart from lowering interest rates, Beijing has also cut the amount of cash that banks must hold as reserves to free up an estimated 1.2 trillion yuan ($191 billion) for lending in a series of moves since November 2011.

FOOD PRICES

Food prices rose 2.4 percent in July from a year earlier, cooling from 3.8 percent in June as pork prices tumbled 18.7 percent, while non-food inflation accelerated slightly to 1.5 percent in July from 1.4 percent in June.

Rising global food prices fuelled by a severe drought in the United States will have a limited impact on Chinese inflation, but volatile food prices could be a cause for concern.

"Food price fluctuation could act as a drag on the further easing of China's consumer inflation in August. But non-food prices will continue to fall on slowing growth," said Li Wei, China economist at Standard Chartered Bank in Shanghai.

"We will need to watch lending and activity data to see whether demand is recovering. If they disappoint, the possibility of another interest rate cut will increase greatly."

The central bank said in a report last week consumer inflation might rebound after August due to seasonal factors and the rising cost of labor and resources.

The benchmark Reuters poll last month showed analysts expected the central bank to deliver its next interest rate cut in the third quarter and two more cuts in banks' reserve requirement ratio by the end of the year.

SLOWING RECOVERY

Industrial output and fixed-asset investment data, due for release later on Thursday, were expected to show signs of a pick-up in activity, indicating that the economy is starting to stabilize after sliding for six straight quarters.

Still, any economic improvement will be fragile as the euro zone debt crisis and a sluggish U.S. recovery keep global growth at a low ebb, the main factor that pushed China's new export orders in July into their steepest fall in eight months.

"The recovery will be very modest - more like stabilization and gradual improvement," said Yiping Huang, chief economist for emerging Asia at Barclays Capital in Hong Kong, speaking before Thursday's data releases.

China's industrial output growth is forecast to pick up to a four-month high of 9.8 percent year-on-year in July from 9.5 percent in June, a Reuters poll showed.

Annual growth in fixed-asset investment, in the likes of real estate, roads and bridges, is seen nudging up in January-to-July to 20.5 percent from January-to-June's 20.4 percent, as the government seeks to spur infrastructure investment.

Growth of retail sales, the biggest driver of the economy's expansion in the first quarter, is seen steady though at 13.7 percent.

Analysts see a pick-up in growth in the third quarter to 7.9 percent and full-year growth of 8 percent, above the official target.

Economic growth has been sliding since the beginning of 2011, reaching 7.6 percent in the second quarter, the weakest pace since the global financial crisis.

(Editing by Alex Richardson and Neil Fullick)

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