3rd LD-Writethru-China Headlines: More easing likely amid subdued inflation

China's May consumer inflation slipped to four-month low and producer prices dropped for a 39th straight month, signaling weak demand and raising the possibility of the central bank rolling out more targeted easing measures in the months ahead.

WEAK DEMAND & CONTINUED DEFLATIONARY PRESSURE

The consumer price index (CPI), a major gauge of inflation, rose 1.2 percent in May from a year earlier, down from April's increase of 1.5 percent, data released by the National Bureau of Statistics showed.

The key gauge's reading, the weakest since January's rise of 0.8 percent, compares with the government's goal of keeping it around 3 percent for the whole of 2015.

On a monthly basis, consumer prices in May slipped 0.2 percent, unchanged from the 0.2-percent drop recorded in April.

The NBS attributed the CPI decline mainly to falling prices of vegetables, fruit and eggs resulting from seasonal factors.

Falling price levels may be a bonus for consumers in the short term, but factories are likely to postpone investment and people reduce spending on the prospect of continued price drops.

A combination of muted inflation and a slowing economy has troubled China as it tries to re-tool its economy for slower but more sustainable growth based on more sophisticated industry.

China's GDP in 2014 grew 7.4 percent, the weakest annual expansion in 24 years. GDP growth in the first quarter of the year further slowed to 7 percent.

There continues to be trend for declining prices at the production end. The country's producer price index (PPI) slid 4.6 percent year on year in May, the 39th straight month of declines, official data showed.

The year-on-year drop in the PPI, a measure of costs for goods at the factory gate, matched April's, according to the NBS.

On a monthly basis, the PPI contracted 0.1 percent in May, narrowing from a 0.3-percent decline in April, which was mainly caused by rising petroleum processing costs.

The 4.6-percent fall was the index's second-largest drop since its downward trend started in March 2012, suggesting continued weak market demand and adding deflationary pressure to China's economy, HSBC chief China economist Qu Hongbin said.

The weak readings in May indicate that deflationary pressure and the real lending rate both remain high, according to a report by China International Capital Corporation (CICC), the country's leading investment bank.

MORE EASING MEASURES EXPECTED

Analysts pointed to the readings as another sign that the world's second-largest economy is still under downward pressure, raising the possibility of the central bank rolling out more easing measures.

The subdued consumer and producer price levels have created more room for central bank monetary easing, said a report released by the Shanghai-based SPD Bank.

In an effort to reduce financing costs and bolster the economy, the central bank cut interest rates for the third time in six months in May.

The reserve requirement ratio (RRR), the amount of cash banks are required to hold as reserves, was cut by 100 basis points on April 20, the second cut this year and the biggest reduction since November 2008, the height of the global financial crisis.

However, the easing measures are yet to lift the lackluster economy. The weak price readings followed Monday's report that both imports and exports contracted again in May.

Exports slipped 2.8 percent year on year to 1.17 trillion yuan (191.16 billion U.S. dollars) last month, while imports slumped 18.1 percent from a year ago to 803.33 billion yuan.

Since last September, China's consumer inflation has stayed below a year-on-year rise of 2 percent.

"Monetary policy must remain on a loosening course until deflationary pressure eases and a more concrete recovery is under way," said an analyst with CICC's macro research team.

Consumer inflation in May suggests "significant deflationary pressures", with an urgent need for more policy easing, said Qu of HSBC.

In its 2015 financial stability report issued in late May, the central bank warned of a slowing economy and rising debt levels. Acknowledging the problem of high borrowing costs, it said it would lower interest rates in a targeted fashion.

In addition to cuts to interest rate and RRR, the central bank has also resorted to pledged supplementary lending (PSL), a monetary tool initiated in 2014 to better target medium-term lending rates and boost liquidity to specific sectors by offering low-cost loans to select lenders.

The People's Bank of China said last week that it provided PSL of 263 billion yuan to financial institutions to fund housing renovation projects in the first five months of this year.

China is not short of economic ammunition as fiscal measures are also available. The National Development and Reform Commission said earlier this year that it would give investment a "key role in stabilizing economic growth" in 2015.

In May, the top economic planning body approved the construction of six railways stretching more than 1,000 km and likely to cost about 250 billion yuan. Endi