China's inflationary pressures eased last month as food prices registered smaller rises, the National Bureau of Statistics (NBS) said on Friday.

But loan controls may need to be loosened to prevent the growing liquidity restraint at many businesses from eroding economic growth, analysts suggested.

China's consumer price index (CPI) growth was 4.3 percent in October, down from 5.2 percent one month earlier, the NBS said.

The price of grain, a major category of food, rose by 28.7 percent, down from 31.7 percent in September. Most other food categories continued to see rising prices, while fresh vegetables witnessed a 9.5 percent price drop.

Subsequently, the increase in food prices, which constitute about one third of China's CPI, slowed 3 percentage points from September to 10 percent.

"Price pressures eased in October, mainly as a result of slower food price increases," said Li Ruoyu, an analyst with the State Information Center (SIC).

Although most analysts as well as the central bank expected the key index to register slower growth in the fourth quarter, the October number was better than expected. Su Ning, deputy governor of the People's Bank of China, had reportedly predicted a 4.8 percent CPI growth for October.

This year's accelerating prices, which pushed the CPI above 5 percent in earlier months, have been a major concern for China's central bank.

The price inflation has locked the real interest rate for Chinese residents in negative territory for months, triggering worries that the quality of life is being undermined.

The one-year deposit rate stands at 2.25 percent, even after a 27 percentage point rate hike by the central bank late last month.

Analysts have been closely watching China's CPI this year, after frenzied fixed asset investment growth starting last year fuelled loan growth and rekindled worries about inflation and an overheated economy.

The authorities have taken a slew of measures, including credit curbs and land controls, to manage a soft-landing of the economy. The growth in fixed asset investment and loans has subsequently slowed down, but some are worrying that the slowdown in monetary growth may be too abrupt and may erode the momentum for economic growth.

China's broad money M2 growth dipped to 13.5 percent last month, which compares to levels above 20 percent recorded in the first half of the year. Many businesses have already been feeling liquidity difficulties following the imposition of credit curbs in the middle of the year.

Last month's interest rate increase threatens to push up corporate costs further and erode their profitability. The NBS said on Friday some companies in Wuhan, central China's Hubei Province, which it surveyed recently, believed the rate increase will increase their interest payments and erode medium and long-term profitability.

"If credit controls are not loosened after the rate hike, there is the risk of more non-performing loans being created and increased financial risks to affect economic growth," Li said.

(China Daily November 13, 2004)