China's annual inflation rate likely cooled to 5.5 per cent in October, data is expected to show on Wednesday. It would be the third straight month of decline from July's three-year peak, though still insufficient for monetary policy to be materially eased.
"We expect (an) unchanged macro policy stance for now," economists at UBS AG said in a client note ahead of the numbers, which kick off a deluge of price, investment, money supply and trade data this week.
UBS expects falling food prices – particularly pork – to have capped consumer price inflation at 5.3 per cent year-on-year in October, after a 6.1-per-cent reading in September and 6.5 per cent in July.
That is at the bottom of the range of forecasts from the 21 economists quoted in the benchmark Reuters poll, where the consensus view is for a year-on-year rise of 5.5 per cent.
Deutsche Bank AG and Bank of Communications International also have a 5.3-per-cent call for October, while China Construction Bank and Shanghai-based private investment advisory firm CEBM top the range of forecasts at 5.8 per cent.
Inflation remains the key focus for investors, with cooling price pressures fuelling expectations that the central bank may start to ease monetary policy as exporters feel the chill from slowing global growth.
China's leaders have begun talking in recent weeks about "fine tuning" macroeconomic policy to maintain economic growth, while making it clear that stabilizing prices and fighting inflation remain the top priority.
Most evidence of that so far has been seen through tweaks to tax policy aimed at small and medium-sized businesses and some signs that bank lending to that sector of the economy – which supports 75 per cent of China's jobs – could be relaxed.
"More visible fiscal and credit easing are expected in Q1 2012, after exports and construction have led to much slower industrial production growth," UBS said.
Analysts at ANZ, however, believe the economic data is deteriorating so quickly that the People's Bank of China could soon start to ease policy by reversing some of the nine hikes to bank reserve requirement ratios made in the tightening cycle that began in October 2010.
China's big manufacturers ran at their slowest pace in October since early 2009, the latest private sector survey of purchasing managers showed, though there were signs of smaller firms bouncing back and a sharp fall in factory-gate prices.
Producer price inflation is forecast to have eased to 5.7 per cent in October from year ago levels versus 6.5 per cent in September, with slowing industrial output seen heralding a further deceleration in the world's second-largest economy.
"We revise our 'selective' policy easing call to an 'outright' policy easing, meaning that in an imminent move, the PBOC will likely make a 50 basis point cut to the RRR for all banks," with a possible larger cut of 100 basis points for small and medium-sized banks, ANZ said in a note to clients last week.
The bank cites signs of softness in the real estate market as being particularly important, given that Chinese banks tend to prefer land and property as loan collateral.
Real estate makes up about 20 per cent of China's fixed asset investment, a primary driver of overall economic growth. FAI growth is expected to have eased marginally to 24.7 per cent in October from 24.9 per cent in September, continuing a broad two-year trend of gradual cooling .
A strong showing for FAI and retail sales would tend to support risk appetite as evidence of still strong domestic demand, assuring jittery investors that China is coping with a slowing global economic backdrop.
ANZ believes, however, that an outright interest rate cut will have to wait until inflation – which it forecasts at 5.4 per cent in October – stabilizes further.