China consumer inflation slowed to 1.8 percent in the year through April from 2.7 percent in March, the lowest rate in 19 months, easing fears about inflation amid rampant speculation on the yuan.
A high base of comparison in 2004, a stabilization of food prices and companies' willingness to cut profit margins rather than lose market share are keeping a lid on consumer inflation despite rising wages and high prices for inputs such as oil, economists say.
Easing inflation is seen a boon to Beijing, under heightened foreign pressure to revalue the yuan.
"The number is pretty good, showing inflationary pressure is under control," said Zhuang Jian, economist at Asian Development Bank in Beijing. "Expectations of a rate rise will decline and the central bank will find it easier to cope with inflation."
"An increase in interest rates is looking less likely this year, but if investment rebounds sharply it's still possible."
The National Bureau of Statistics released the data on Monday. Economists surveyed by Reuters had expected an April consumer price index 2.6 percent higher than a year earlier.
The published figure was in line with rumors circulating last week in China's financial markets, however.
Consumer price inflation in the year through April was the lowest since September 2003, when prices were 1.1 percent higher than a year earlier.
Analysts are on high alert for signs of quickening inflation because of foreign money coming into China as a bet on a yuan revaluation. To keep the yuan fixed near 8.28 per dollar, Beijing has had to buy up those foreign funds, but doing so fuels money supply.
Economic theory dictates that this will feed eventually into higher prices.
But that has not yet happened, partly because the central bank has been mopping up the extra yuan it creates by selling bills, but the challenge of controlling money supply is one of the main reasons most economists advocate a stronger yuan.
The central bank has also tried to limit inflation by telling banks to curb loans to such hot sectors as property, steel and cement.
Upward pressure
Although easing inflation may give Beijing more time to weigh options on reforming its rigid currency regime, analysts said upward pressure on the yuan was unlikely to cool sharply any time soon given China's hefty balance of payments surplus.
"Revaluation pressure may ease to some extent," said Xiao Minjie, economist at Daiwa Institute of Research in Shanghai.
"But upward pressure on the yuan comes mainly from the country's balance of payments surplus," he said.
China's capital account surplus in 2004 more than doubled over the previous year to nearly $111 billion, while the current account surplus widened 50 percent to almost $69 billion.
Analysts say Beijing needs to work through a short list of preparations, including expanding the tightly controlled foreign exchange market, before changing the exchange rate peg.
Consumer price inflation, which peaked at a seven-year high of 5.3 percent in the year through August, helped trigger the country's first interest rate rise in nearly a decade in October.
Some economists said they believed Beijing might need to raise interest rates again because overall inflationary pressure, including housing prices and producer prices, remained strong.
"CPI inflation is likely to rebound from May and June because the government will probably take the opportunity to raise utility prices," said Zhu Jianfang, economist at China Securities in Beijing.
"I personally think the possibility of raising interest rates in the first half still exists."
But analysts are divided on when and how high producer price inflation will filter through to consumer inflation, as most Chinese producers of consumer products are trying to cope with rising raw material costs by improving efficiency, rather than raising ex-factory prices in the face of fierce competition.
Producer price inflation accelerated to a higher-than-expected 5.8 percent in the year through April from 5.6 percent a month earlier, the government said last week.
(China Daily May 16, 2005)
