China prices to bottom in Q3, may rebound

Consumer prices in China are stabilising after months of declines and could bottom out at the end of the third quarter before rebounding, said the statistics department of the central bank in a report yesterday.

It was the most explicit official statement yet pointing to the possibility of a return to inflation as China's economic recovery picks up steam, though analysts cautioned against interpreting it as a signal of monetary tightening.

"From an overall viewpoint, the consumer price index (CPI) will stabilise in the second half of this year and may rebound," said the statistics department of the People's Bank of China.

"Our composite index showed that CPI would hit bottom at the end of the third quarter," it said.

The consumer price index in June fell 1.7 per cent from a year earlier, its fifth straight month in mild deflationary territory.

"Global commodity markets have shown an overall trend of bottoming out and 'imported' inflationary pressure is likely to rise in the future," said the central bank report. "Domestic demand is rising with continued sufficient liquidity, and inflationary expectations are emerging."

The central bank also said the second-quarter growth recovery was stronger than expected, at 14.9 per cent on an annualised, seasonally adjusted basis. Earlier this month, China reported that second-quarter GDP rose 7.9 per cent from a year earlier.

"We should not read too much into it. It is very common across China, across the world that people start to consider inflation, so it is okay for them to say inflation will possibly come back," said Ting Lu, economist with Merrill Lynch.

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