By Judy Hua and Kevin Yao
BEIJING (Reuters) - China's consumer inflation slowed more than expected in September to a near five-year low, adding to concerns that global growth is cooling fast unless governments take bolder measures to shore up their economies.
While much of the decline was due to falling prices for food, fuel and other commodities, which are benefiting consumers globally, the data also pointed to broad weakness in the world's second-largest economy.
Facing mounting risks to growth and rising risks of deflation, Beijing is widely expected to continue rolling out a steady stream of stimulus measures in coming months, though most economists believe it will hold off on more aggressive action such an interest rate cut unless conditions sharply deteriorate.
"Policymakers in Beijing should begin to be concerned that global disinflationary pressures are spreading to China," said Dariusz Kowalczyk, senior economist at Credit Agricole CIB in Hong Kong.
"The low inflation readings will open the door to further targeted monetary and fiscal easing. There is also less need for a strong currency to offset imported inflation."
The consumer price index (CPI) rose 1.6 percent in September from a year earlier, the National Bureau of Statistics said on Wednesday, missing market expectations for a 1.7 percent rise and down from 2 percent in August.
The reading was the lowest since January 2010, and was also partly due to a relatively higher base of comparison a year ago, officials said.
Inflation is also easing in other parts of Asia from India to South Korea, whose economy is also sputtering and facing growing fears of deflation.
But price softness in China was not all down to food and fuel. Its data also showed further downward pressure from the cooling housing market, which economists say is the biggest single risk facing China's economy.
The CPI rose 0.5 percent in September from the previous month, versus a 0.4 percent gain expected by economists.
"The low inflation readings suggest rising risks of deflation in China due to weak domestic demand. It confirms our view that risks to growth are still on the downside, and further policy easing measures are needed," HSBC economists said.
With inflation well below the official annual target of 3.5 percent, Chinese policymakers have ample scope to announce more stimulus, on top of a flurry of steps earlier in the year.
But as neighbouring Japan and many Western countries have found, simply injecting a mountain of money into the system may have limited impact on the real economy if demand is too weak to absorb it and banks remain reluctant to lend.
Further attempts by the central bank on Tuesday to keep market interest rates relatively low also suggest authorities may be content to take a more measured response for now.
Still, some economists believe the chances of bolder policy action are rising.
"Easing gains (in) non-food prices and the worsening PPI provide more evidence of a weakening economy, which means the problems of weak domestic demand and over capacity are more severe than expected," said Li Huiyong, an economist at Shenyin & Wanguo Securities in Shanghai.
"We expect policymakers will take more measures to stabilise the economy. The possibility of an interest rate cut is increasing in the coming months."
Highlighting the increasing strains on companies in China, the producer price index (PPI) fell 1.8 percent, its 31st consecutive monthly decline, dragged by lower oil and steel prices. The market had expected a 1.6 percent fall in producer prices after a drop of 1.2 percent in August.
Weakening demand is not only curbing companies' pricing power and cutting into their profit margins but putting increasing strains on their balance sheets and ability to pay back debts, posing a growing threat to the banking system.
Highlighting faltering demand, the country's second-biggest steelmaker, Baoshan Iron and Steel (SS:600019) (Baosteel), said on Friday it will cut prices for November delivery.
Major construction machinery maker Zoomlion Heavy Industry Science and Technology Co Ltd said on Tuesday it expects third-quarter net income to fall as much as 90 percent on continued weakness in the market.
Premier Li Keqiang said earlier this month that China will avoid a hard landing despite worries about the real estate market. Li also said he was confident the economy would continue to grow at a "medium to high tempo", forecasting growth of about 7.5 percent this year, which appears sharply at odds with the low inflation figure.
SLOWING PROPERTY MARKET BIGGEST RISK
The latest Reuters poll showed China's economy likely grew 7.2 percent in the third quarter from a year earlier, its weakest pace in more than five years as the property downturn weighed on demand.
Wang Jun, senior economist at China Centre for International Economic Exchanges, a Beijing-based think tank, believes that the central bank is more likely to cut all banks' reserve requirement ratio (RRR) to encourage more lending and support growth.
"Cutting RRR in the fourth quarter is possible but it cannot be seen as full-flown policy loosening. The possibility of cutting RRR is far bigger than cutting interest rates, which is seen as a strong stimulus."
Trade data on Monday showed China's export performance in September beat forecasts, an encouraging sign for authorities who are trying to avert a sharp downturn, even though domestic demand likely remained weak despite surprisingly firm imports.
Third quarter gross domestic product along with September retail sales, industrial output and investment data will be released on Oct. 21.
(Reporting by Judy Hua, Shao Xiaoyi and Kevin Yao; Editing by Kim Coghill)