Slower inflation and a modest recovery in exports have given China's policy makers more room to manoeuvre, ahead of third-quarter results expected to show a dramatic overall slowdown in the country's economic growth.
The inflation rate held at 1.9 per cent in September, down slightly from August's 2 per cent, according to National Bureau of Statistics data released Monday, despite fears that policy adjustments to spur growth could also drive prices higher.
Exports, meanwhile, climbed 9.9 per cent from a year earlier, compared with an anemic 2.7-per-cent growth in August. Imports, at a 2.4-per-cent increase, were still improved over August's performance of a 2.6-per-cent drop.
"Some have been overoptimistic. Some thought that the third quarter would be the turning point and now, maybe it's not," said Lu Feng, a professor of economics at Beijing University's China Centre for Economic Research. "But it's not getting worse. The growth rate of exports is getting better."
Food inflation, key to a government obsessed with maintaining social stability, dropped to 2.5 per cent from 3.4 per cent in August, thanks to good harvests and an abundant pork supply. The producer price index dropped 3.6 per cent – a seventh straight month of deflation, but at a less dramatic pace, suggesting some stabilization.
"We expect inflation to rise in Q4, but it will not be a constraint on policy loosening in the next couple of months," wrote Mark Williams and Qinwei Wang of Capital Economics in London.
The numbers are uplifting compared with third-quarter results expected Thursday, which are forecast to show China's economic growth has slowed for a seventh consecutive quarter and is likely to be below the government's year-end target of 7.5 per cent. That number is still within reach for the year, but it remains a dramatic slowing for a country more used to double-digit numbers.
Calls for stimulus spending have met a more muted response than during the economic crisis, when the government unleashed a four-trillion-yuan spending package focusing on infrastructure.
That continuing legacy of bad loans and overcapacity has turned policy makers this time toward provincial-level projects, modest infrastructure spending, easing of interest rates and banks' reserve requirements and, in recent weeks, record injections of short-term cash into money markets.
Last week, for example, the Ministry of Finance announced more help for importers with the equivalent of nearly $400-million in loan subsidies on upgrading equipment and purchases of raw materials.
"It is a modest, pro-active approach," Prof. Lu said. "In this round of the macroeconomic cycle the government has learned the lesson of the last one. … The macroeconomy in China is weak, but part of the reason it is weak is the hangover effect of the last package."
At stake for China is maintaining stability during next month's 18 Communist Party Congress, which marks the start of the once-in-a-decade, closed-door handover of power to the anointed successors of Premier Wen Jiabao and President Hu Jintao. With government completely absorbed in the power transition, any dramatic action on the economy is all but ruled out.
"The policy makers should be conservative, in terms of making no big changes. They'll try to keep things very stable," said Li Lixing, an economics professor at Beijing University.
Writing from Tokyo, following last week's IMF and World Bank meetings – boycotted by Chinese officials still angry about the fate of the Japanese-controlled, uninhabited islets known as Senkaku in Japanese and Diaoyu in Chinese – HSBC economist Frederic Neumann was sombre in his analysis of the regional state of affairs.
"The fourth quarter, in short, is all about political risk. [Global] growth may have started to stabilize, but it is too fragile to withstand policy missteps in the world's leading economies. … We still think that China at least will start to fire up again early next year. But that assumes that the political transition proceeds smoothly and important decisions aren't delayed."