Update: China May inflation muted but producer deflation eases, policy seen steady

[BEIJING] Deflationary pressures in China eased further in May, relieving some pressure on cash-strapped companies, but consumer inflation was cooler than expected, suggesting the central bank will keep policy supportive in coming months but be in no hurry to cut interest rates further.

Consumer inflation rose less than forecast as pressure from high food prices eased, while producer prices recovered more than forecast, the statistics bureau said on Thursday.

The consumer price index (CPI) rose 2.0 per cent year-on-year in May, compared with a 2.3 per cent increase in April. Food prices were up 5.9 per cent year-on-year in May after rising 7.4 per cent in April.

Prices of China's staple meat pork rose 33.6 per cent last month and hit record levels last week.

Non-food prices rose 1.1 per cent, flat from April and continuing to show a lack of price pressures that would indicate activity in the broader economy was gaining steam.

Analysts polled by Reuters had expected consumer inflation to come in at 2.3 per cent, the same pace as in each of the previous three months.

"On a month-on-month basis, China's CPI has been dropping for three consecutive months, clearly pointing to an easing bias in monetary policy for the time being," said Zhou Hao, senior Asia emerging market economist at Commerzbank in Singapore.

Improvements in producer prices will not change China's overall soft inflation outlook, Mr Hao added.

In a sign that strains on Chinese companies are easing, producer prices fell at their slowest rate since November 2014, supported by a government investment spree and higher commodity prices.

The producer price index (PPI) fell 2.8 per cent in May, up from a 3.4 per cent drop in April.

On a monthly basis, producer prices rose 0.5 per cent, the third increase in a row.

Analysts had expected PPI to fall 3.3 per cent, extending a more-than-four-year decline which has eroded profit margins.

China's consumer inflation rate remains well below the official 3 per cent target, and despite strengthening producer prices analysts do not see inflation at these levels impacting policy decisions.

"At these levels, inflation dynamics are not an important factor in this year's monetary policy decisions," said Zhu Haibin, chief China economist at JPMorgan.

Mr Zhu says May and June economic data will continue to show a recovery, but expected growth will slow again in the second half, which should lead to further support from the government.

"We still see one interest rate cut this year. It's a close call, but we see that it is still likely to happen. We moved the timing to the fourth quarter when we see the growth dynamics slowing down."

Many economists have scaled back expectations of further cuts in interest rates and bank reserve ratios this year as the PBOC has shown a preference for more targeted cash injections to help badly stressed sectors such as farming and small companies.

The government also seems to be putting a greater emphasis on fiscal spending to support growth, amid worries of the dangers of relying on too much debt-fuelled stimulus.

Data released on Wednesday showed China's exports in May weakened, but imports were stronger than expected, pointing to improving domestic demand and adding to hopes that the world's second-largest economy may be slowly stabilising.

REUTERS