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Chinese inflation falls to 20-month low

By David Pierson, Los Angeles Times –

BEIJING — China’s annual inflation rate fell to a 20-month low in February, giving policymakers room to ease lending at a time of tapering economic growth.

“The inflation story is over, leaving (China’s central bank) with fewer excuses not to step up its easing efforts, especially given a sharp slowdown in exports so far this year,” said Qu Hongbin, co-head of Asian Economics Research for HSBC, in a note to clients Friday. “Get ready for more steps toward policy easing.”

Consumer prices rose 3.2 percent from a year earlier, down from 4.5 percent annual growth in January, China’s National Bureau of Statistics said Friday.

The slowdown was led by food prices, which rose 6.2 percent in February compared to 10.5 percent in January.

The numbers are partly distorted by the Chinese New Year, when the cost of food tends to spike. The national holiday fell in January this year and February last year, creating a favorable base effect.

Still, the latest data ease pressure on the central government, which made tackling inflation one of its chief priorities last year.

A massive stimulus plan after the financial crisis fueled giant asset and real estate bubbles in China, helping push inflation to a three-year high last summer.

Beijing has shown no willingness to stimulate its economy on that scale again, even though growth at home is projected to decline and the European crisis presents a high degree of uncertainty for the global economy.

On Monday, Chinese Premier Wen Jiabao lowered the country’s growth target for the first time in eight years, setting an expansion of 7.5 percent as a baseline.

The central government has also resisted calls to lift buying restrictions on the property market, which has experienced months of falling prices.

Instead, analysts expect Chinese policymakers to implement modest loosening measures such as lowering banks’ reserve ratios.

Whether this will be enough to ward off an economic hard landing will depend on deft policy-making, analysts say.

“There is a tricky balance to be played going forward,” wrote Alistair Thornton, a Beijing-based analyst for the IHS Global Insight in a research note. “The government craves the growth effects of further monetary easing, but does not want to stomach the inflationary implications. The unfortunate thing is, it’s becoming increasingly hard to have their cake and eat it.”

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