More stimulus measures likely as inflation cools in June

China's inflation moderated in June on mild increase in food costs, leaving room for more policy easing to support the economy.

The Consumer Price Index, the main gauge of inflation, rose 2.3 percent from a year earlier last month, the National Bureau of Statistics said yesterday.

It slowed from the pace of 2.5 percent in May -— a four-month high — after food costs weakened to grow 3.7 percent in June from 4.1 percent a month earlier.

The Producer Price Index, the factory-gate measurement of inflation, remained negative for the 28th straight month by declining 1.1 percent in June. The gap narrowed for a third consecutive month and compared with a 1.4 percent drop in the prior month.

In the first half, CPI inflation expanded 2.3 percent, way below the full-year target limit of 3.5 percent.

"The subdued inflation provides room for the authorities to launch more targeted stimulus policies in the second half," said Zhou Hao, an economist at Australia & New Zealand Banking Group Ltd. "Further monetary policy easing across the board will still be needed to help lift the confidence in China's economy."

Zhou noted that another reserve requirement cut, which allows banks to set aside less money as reserves, is likely in the early third quarter for China to deliver the 7.5-percent growth target for this year.

Chang Jian, an economist at Barclays, said the June CPI came in below expectations and that inflation won't be a constraint for policy easing in 2014.

"We expect the government to accelerate fiscal spending and open up more infrastructure sectors to the private sector," Chang said. "Inflation may be set to rise, but will be contained this year."

Chang added that it would be difficult for China to fulfill the growth target given the downside risks from the ongoing property slide. Although property sales recovered a bit in June thanks to promotions by large developers, it would not change the trend of slowing property investment.

In the first quarter, China's gross domestic product expanded 7.4 percent, the slowest in 18 months. The second-quarter figure will be released next week.

Some analysts were more optimistic.

Zhang Zhiwei, a Nomura economist, said inflation will remain mild in the third quarter, leaving room for further policy easing, which should help boost growth to 7.5 percent in the third quarter and 7.6 percent in the fourth quarter.

"A batch of macroeconomic data is due to be rolled out next Wednesday, and we expect the data to be on the strong side," Zhang said. "Property investment growth will continue to slow in the second half, but policy easing should help contain the pace of the slowdown in the sector."

Earlier data showed the manufacturing sector delivering its best performance this year in June as both the official Purchasing Managers' Index and the HSBC PMI increased to the expansionary turf.

It was helped by a series of targeted stimulus measures, including the adjustment of loan-to-deposit ratio that eases lending curbs for commercial banks, cuts to the banks' reserve requirement ratio, more investment in railways and the encouragement of private investment in state-owned enterprises.