China June inflation eases to 2.2 percent

China's annual consumer inflation eased more than expected to 2.2 percent in June from 3.0 percent in May, creating more room for the central bank to ease policy to bolster economic growth.

KEY POINTS:

June CPI +2.2 pct y/y (forecast +2.3 pct, May +3.0 pct)

June PPI -2.1 pct y/y (forecast -1.9 pct, May -1.4 pct)

COMMENTARY:

ZHANG ZHIWEI, CHIEF CHINA ECONOMIST AT NOMURA IN HONG KONG

"The decline of year-on-year CPI inflation was driven by base effects as well as lower food prices. On a month-on-month basis, CPI dropped by 0.6 percent in June. Since 2001, CPI inflation has dropped on average by 0.5 percent in June.

"We expect CPI to drop further in July to less than 2 percent. Lower CPI opens room for further policy easing, which we expect will pick up. In particular Premier Wen's comments over the weekend point to stronger public investments in coming months.

"CPI will likely rebound in Q4 as a growth rebound leads to a positive output gap, and food prices usually rise after summer, but full-year CPI inflation will likely be lower than the 4 percent annual target for 2012. This opens up room for energy price reforms.

"We continue to expect two RRR (required reserve ratio) cuts in 2012, the next cut as early as in July. We do not expect further interest rate cuts in 2012."

KEVIN LAI, ECONOMIST, DAIWA, HONG KONG:

"This shows there is a further demand slowdown in China, and much lower import prices as a result of a stronger dollar. Going forward I see further moderation in the CPI. In the fourth quarter, there may be some additional pressure from food prices, mainly because supply is quite tight again. 

"I see two more reserve requirement ratio cuts but no more rate cuts. There are some risks with inflation and monetary policy is supposed to be forward looking and pre-emptive."

DONGMING XIE, ECONOMIST A OCBC BANK, SINGAPORE:

"China's June consumer inflation fell more than we expected to 2.2 percent yoy from 3.0 percent in May, justifying the central bank's rate cut last Thursday.

"Inflation is no longer an imminent threat to China. We expect July CPI to fall below 2 percent. August and September will be important months to monitor from an inflation perspective. If prices fall too fast, fuelling deflationary expectations, China is likely to cut interest rates further."

LINKS:

For details, see the website of the National Bureau of statistics at www.stats.gov.cn.

MARKET REACTION:

The Shanghai stock market extended earlier losses to fall 0.6 percent after the data. The Chinese yuan was trading at 6.3710 per dollar.

BACKGROUND 

-China's inflation has fallen steadily from a three-year peak of 6.5 percent in July 2011 in response to a series of policy tightening steps and weakening economic activity.

- Although inflation is expected to ease throughout the year, policymakers remain wary as they fear loose monetary policies in the West could reignite Chinese inflation, alongside rising domestic labor costs.

- The government has set a lower economic growth target of 7.5 percent for 2012 and an annual inflation target of 4 percent.

- The central bank cut interest rates last week for the second time this year to bolster the slowing economy.

- China has also cut banks' reserve requirements three times since November 2011.