China's inflation is showing signs of easing further, givingPremier Wen Jiabao more room to loosen fiscal and monetary policiesas the economy cools and Europe's sovereign-debt crisis threatensexports.

An index of manufacturers' input costs fell the most in 17months in October, China's logistics federation and the statisticsbureau said yesterday. A separate survey by HSBC Holdings Plc andMarkit Economics also showed a decline.

China's central bank has paused in raising interest rates andbank reserve requirements as officials assess the risk that Groupof 20 leaders meeting in Cannes, France, this week will fail tocontain the crisis. Inflation may moderate to below 5 percent inNovember and December, compared with a three-year high of 6.5percent in July, said Zhu Jianfang, the most accurate forecaster ofthe number in Bloomberg News surveys over the past two years.

“Food and global oil prices have peaked and that means inflationwill fall,' said Zhu, a Beijing-based economist for CiticSecurities Co. Ltd. “The decline will leave more room for policyeasing such as looser credit to help sustain growth.” October'sinflation rate, due to be reported next week, may be 5.3 percent or5.4 percent, he said.

The median forecast of 10 economists in a Bloomberg News surveyis for a 5.4 percent increase in consumer prices from a yearearlier, compared with a 6.1 percent gain in September. Fallingglobal commodity costs and government policies to stabilize priceshave eased inflation pressures, the statistics bureau said in acommentary yesterday.

China's manufacturing may be on the verge of a “major slowdown”as orders weaken, Daiwa Capital Markets said in a note afteryesterday's data. The threat from Europe's crisis was highlightedas global equities sank after Greek Prime Minister GeorgePapandreou said a financial rescue plan for his nation would be putto the vote by citizens.

The Shanghai Composite Index reversed a decline of as much as1.5 percent to close 1.4 percent higher at 2,504.11 on speculationthe central bank may ease monetary policy to bolster the economy.Twelve-month non-deliverable yuan forwards traded 0.1 percenthigher at 6.3728 per dollar at 4:30 p.m. in Hong Kong, according todata compiled by Bloomberg.

“Greece's referendum has put Europe's bailout plan in jeopardyand the sovereign debt problem will continue to haunt the globalmarkets,” said Wei Wei, an analyst at West China Securities Co. inShanghai.

The federation's purchasing managers' index dropped to 50.4 inOctober, the lowest reading since February 2009 and less than anyof 16 economists estimated. Goldman Sachs Group Inc. said seasonaldistortions may have played a role. A measure of input costs fellto 46.2, the first reading below 50 since March 2009.

HSBC's manufacturing gauge, which has a different sample thanthe government's measure, rose to 51 from 49.9, with purchase-priceinflation easing “sharply” to a four-month low, the bank said in astatement.

Premier Wen said last week that economic policies will be “finetuned” as needed and the industry ministry said it's studying“stimulative policies” for smaller companies as the global slowdownthreatens growth. The logistics federation's measure of exportorders showed a contraction for October.

A trial of value-added tax changes announced by the governmentmarks the “official start” of selective easing to support growth,HSBC's Hong Kong-based economist Qu Hongbin said on Oct. 27.

Producer-price inflation has slowed from a near three-year highof 7.5 percent in July, previously-released statistics bureau datashow. Costs of iron-ore imports, Brent crude oil and aluminum havetumbled. Some units of Aluminum Corp. of China Ltd., the nation'sbiggest producer of the metal, may face cash- flow challenges ifprices continue to drop, President Luo Jianchuan said Oct. 24.

“China is likely to practice sector-specific easing, such aseasing credit for smaller businesses, or adjusting reserve ratiosfor individual banks,” said Tim Condon, Singapore-based head ofAsia research at ING Groep NV. “The central bank will avoid abroad-based policy easing such as an interest-rate cut so as not toundo the progress it has made in curbing the excesses from the2008-2009 credit expansion.”

China has kept interest rates on hold since July in the longestpause since increases began in mid-October last year.

Economists at Mizuho Securities Asia Ltd., Australia & NewZealand Banking Group Ltd. and Societe Generale say the centralbank may cut reserve requirements for smaller lenders aftercompanies in some cities, such as Wenzhou, complained of a fundingsqueeze.

Deposit rates have lagged behind inflation for 20 months, withthe benchmark one-year savings rate now at 3.5 percent. That'sencouraged savers to shift money out of banks and into propertyspeculation and riskier channels including non-bank lending, whereinterest rates are as high as 70 percent a year, according to DongTao, a Hong Kong-based economist with Credit Suisse AG.

Officials should raise benchmark interest rates to help curbinformal lending, Guo Tianyong, a finance professor at the CentralUniversity of Finance and Economics in Beijing, said at aconference yesterday.

Bloomberg