Falling prices help Chinese recovery

China's consumer prices fell for a third month on food and commodity costs, aiding government efforts to boost spending in the world's third-biggest economy.

Prices dropped 1.5 per cent in April from a year earlier, after falling 1.2 per cent in March, the statistics bureau said today. The median estimate in a Bloomberg News survey of 21 economists was for a 1.4 per cent decline. Producer prices fell 6.6 per cent, the most since Bloomberg data began in 1999.

Falling prices may lower costs for businesses and encourage consumers to spend, helping the economy to recover after exports collapsed. The absence of inflation makes it easier for the central bank to maintain its "moderately loose" monetary policy after five interest-rate cuts last year.

"Prices are declining largely because of commodity and food costs and in both cases that's more positive than negative for the economy," said Wang Tao, an economist at UBS AG in Beijing. She said easing prices would give consumers extra spending power and lower costs for producers.

The yuan traded at 6.8216 against the dollar, from 6.8209 before the number was released.

In April 2008, inflation was 8.5 per cent as pork prices soared because of a shortage of the meat, a Chinese staple. The gains encouraged farmers to raise more pigs, leading to an oversupply. Now, pork prices have tumbled close to a level that may trigger purchases by the state to buoy farm incomes, the government says. Pork fell 28.6 per cent last month from a year earlier, the statistics bureau said.

The Reuters/Jefferies CRB Index of 19 raw materials, including oil and copper, is down about 43 per cent from a year ago. McDonald's Corp is among companies to have cut prices in China this year.

Price declines, along with subsidies for purchases of durable consumer goods, may aid government efforts to increase rural consumption, said Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong. "This is not 'bad' deflation," he said.

The central bank is on guard against the risk that consumers, expecting prices to fall, will delay purchases, choking off demand and stifling economic growth.

The government's options include raising state-controlled prices of resources and purchasing farmers' products to stabilise prices.

The flood of money into the economy from record new lending and a 4 trillion yuan ($586 billion) stimulus package makes protracted price declines less likely.

Around the globe, the response to the economic crisis - governments pumping billions of dollars into their financial systems - may fuel inflation as economies revive.

The People's Bank of China said last week that a recovering economy and strong lending growth are limiting price declines and a global economic revival may also help.

It also highlighted risks that monetary easing by major central banks could lead to inflation risks for "the whole world."

Ben Simpfendorfer, a senior economist at Royal Bank of Scotland in Hong Kong, expects prices to fall 1.5 per cent in 2009, "a positive development" because of the extra spending power it will give to consumers.

China has "some breathing space" before inflation makes a comeback, he said, predicting consumer prices will rise 2 per cent in 2010, 5 per cent in 2011 and 8 per cent in 2012 because of shortages of labour, raw materials and land as the economy grows.

China may be the first economy in Asia to face inflationary risks as extra money in the financial system spurs gains in asset prices and then consumer prices, Chris Leung, a senior economist at DBS Bank Ltd. in Hong Kong, said last week.

- BLOOMBERG