China's economy cools, limiting room for tighter policy

By Kevin Yao and Aileen Wang

BEIJING (Reuters) - China's inflation eased in April to 5.3 percent and other data, including industrial output and loans, suggested slower activity in the world's second-biggest economy and less room for further aggressive moves to tighten monetary policy.

Inflation was slightly higher than expected but lower than a 32-month high in March of 5.4 percent, underlining expectations that price pressures were peaking and would start to ease in the second half of 2011.

"Price pressures are still uncomfortably strong, but there are some signs in today's data that policy measures put in place over the last six months or so are having an impact," said Brian Jackson, economist with Royal Bank of Scotland in Hong Kong.

Jackson said inflation remained high enough to warrant two more increases by the central bank in interest rates and further yuan appreciation against the dollar.

"The April economic indicators make it less likely that the central bank will raise required reserve ratios or interest rates. I believe the central bank will, at most, raise reserve requirements once in the coming two months," said Shao Yu, an economist with Hongyuan Securities in Shanghai.

The central bank has raised interest rates four times since last October and banks' reserve requirements seven times, which has meant big banks have a record 20.5 percent in deposits tied up. Those funds could otherwise become loans.

Markets showed little reaction to the data.

China's industrial output in April rose 13.4 percent from a year earlier, easing from a pace of 14.8 percent in March, the National Bureau of Statistics said. Output had been forecast in a Reuters poll to rise by 14.7 percent.

Retail sales rose 17.1 percent, lower than 17.6 percent forecast in a Reuters poll and weakening from 17.4 percent in March.

Chinese banks extended 739.6 billion yuan ($113.9 billion) in new yuan loans in April, more than market forecasts for 700 billion yuan, People's Bank of China figures showed.

M2 money supply growth of 15.3 percent was much lower than forecasts for 16.5 percent and also marked the lowest pace in 29 months.

Outstanding yuan loans at the end of April were 17.5 percent higher than a year earlier, also the weakest pace in 29 months, central bank data showed.

Though far too soon for Beijing to declare victory in its battle against inflation, the stabilization of prices suggested that tighter monetary policy was beginning to produce initial results, analysts said.

The government has a target of 4 percent annual inflation, but some analysts said it could be tough to achieve that goal given increasing labor costs and rising commodity and fuel prices.

(Additional reporting by Zhou Xin, Langi Chiang; writing by Neil Fullick)