August CPI Drops to Lowest Since July 2007   

By Lily Wang   
The growth of China's consumer price index (CPI) dropped to 4.9% this August, lowest level since July 2007, according to the National Bureau of Statistics on September 10th.
    The CPI, the main gauge of inflation, fell mainly because of a drop in food prices this August, which increased 10.3% year-on-year, but down 4.1 percent age points from July.
    "The CPI growth is expected to fell to around 4% at the end of 2008, with an annual average of 6.4%", a senior analyst said, "Because food prices may continue to drop."
   But producer price index (PPI), an indicator of factory gate inflation, rose 10.1% year-on-year in August, following jumping 10% in July.
    "The soaring prices of fuels and raw materials and high labor cost resulted in the high PPI", according to some insiders.
   CPI inconsistent with PPI represents that producers have not pass their cost pressures on to consumers, which will squeeze producers' profits and make them limit production.
    The falling inflation rate gives the government a good chance to further lift prices of fuel, water and electricity, and to promote steady economic growth. Since the second quarter of 2007, the government has adopted monetary and credit measures to rein in inflation and prevent the economy from overheating further.
    On September 15th, the People's Bank of China (BOC) announced China reduces the RMB benchmark loan interest rate of 0.27 percentage points for one year loans, from 7.47% to 7.2%, effective September 16th, 2008.
    In addition, the deposit- reserve requirement ratio that lenders are required to set aside is down 1 percentage point effective September 25th, 2008. The country's major lenders - the Industrial and Commercial Bank of China, the Agricultural Bank of China, BOC, the China Construction Bank, the Bank of Communications and the Postal Savings Bank of China, are excluded and are still required to set at the existing 17.5% rate.
    The current deposit-reserve requirement ratio is set at 16.5% after five consecutive increases this year, down from a record 17.5% adjusted on June 15th, 2008.
    The move aims to ensure a steady and rapid economic growth and help small banks and fenders solve the problem of fund deficit.
    "It indicates the government starts initiatives to maintain the economic growth as enterprises faced difficulties, especially needing fund supports. The eased inflationary pressure this August also provided a timely chance for the adjustment," said an economist.
    According to an analyst, that action would give small- and medium banks an advantage in extending loans and benefit small firms that were the main customers of those banks and had suffered lost in the first half of 2008.
    "The move is to solve prominent problems in the current economic operation, implement different policies for different needs and optimizing the economic structure, and to ensure a steady, rapid and sustained development of China's economy", BOC said.