China's inflation cooled to the slowest pace since June 2007 on smaller gains in food prices, giving the central bank more room to stimulate growth in the world's fourth-largest economy.

Consumer prices rose 4.9 percent in August from a year earlier, after gaining 6.3 percent in July, the National Bureau of Statistics said today. That was less than the 5.4 percent median estimate of 23 economists surveyed by Bloomberg News.

China may use tax cuts, a slowed pace of yuan appreciation and a further easing of lending restrictions to protect jobs and avoid an economic slump as export demand falters. Producer-price inflation accelerated to the fastest pace since at least 1996, today's data showed, signaling that policy makers still need to balance measures to boost growth against the risk that inflation will accelerate again.

``The inflation problem isn't completely solved,'' said Kevin Lai, senior economist at Daiwa Institute of Research in Hong Kong. ``China will have to sacrifice a little bit of economic growth to make sure inflation doesn't rebound.''

The yuan fell to 6.8405 against the dollar as of 10:12 a.m. in Shanghai after closing at 6.8381 yesterday.

Producer prices climbed 10.1 percent, after rising 10 percent in July.

Consumer-price inflation has slowed for four months. February's 8.7 percent pace was the fastest in 12 years. The central bank's target for the

year is 4.8 percent, the same as the actual rate in 2007.

Food Inflation

Food prices rose 10.3 percent in August from a year earlier after gaining 14.4 percent in July. Non-food prices increased 2.1 percent, the same as the gain in July.

``Inflation in China will probably continue to fall,'' said Carl Weinberg, chief economist at High Frequency Economics Ltd. in New York. ``The central bank may relax monetary conditions a bit now, offsetting whatever downside potential there may be for economic growth.''

Growth in factory and property spending, one of the key drivers of the world's fastest-growing major economy, maintained its pace in the eight months through August.

Urban fixed-asset investment rose 27.4 percent to 8.49 trillion yuan ($1.24 trillion) from a year earlier, the statistics bureau said today. That compared with a 27.3 percent gain for the first seven months.

China's economy expanded 10.1 percent in the three months ended June 30 from a year earlier, slowing for a fourth straight quarter as exports cooled. Weaker overseas demand, rising costs and a strengthening currency have put pressure on exporters of shoes, toys and clothes.

Lending Restrictions

In July, the central bank eased restrictions on how much banks can lend. It raised 2008 loan quotas for national banks by 5 percent and regional lenders by 10 percent, according to reports by Goldman Sachs Group Inc., BNP Paribas SA, and China Merchants Bank Co.

The People's Bank of China has kept interest rates unchanged this year and hasn't increased the reserve ratio for banks -- the proportion of deposits that lenders are required to set aside -- since June.

``Monetary policy will steadily turn more growth-friendly, given the rising growth concerns and moderating inflation,'' said Grace Ng and Wang Qian, economists at JPMorgan Chase & Co. in Hong Kong. They expect one 50 basis-point cut in the reserve requirement, now a record 17.5 percent, and slower appreciation by the yuan for the rest of the year.

Currency Gains Slow

The currency has climbed only 0.2 percent against the dollar this quarter after a 6.5 percent advance in the first half. Gains hurt exporters by making their products more expensive and less attractive in overseas markets.

The central bank may ease loan quotas by another 5 percent to 10 percent no later than November, according to Sun Mingchun, an economist at Lehman Brothers Holdings Inc. in Hong Kong. The government may cut income tax and, from early 2009, allow tax deductions connected with companies' capital expenditure, he said.

The government has already cut taxes on exports of textiles and garments and encouraged more lending to small and medium- sized businesses. Officials are working on a plan for as much as 400 billion yuan ($58 billion) of tax cuts and spending to prevent an economic slump, according to economists and reports in domestic news media.

Purchasing prices jumped 15.3 percent in August, less than the 15.4 increase in July, the statistics bureau said today.

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