By staff reporter Wang Zhen

The Shanghai Composite Index closed at 2150.76 Wednesday, up a mere 0.23 percent from the previous day’s closing, despite surprising news that China’s consumer price index declined to 4.9 percent last month from 6.3 percent in July.

The CSI 300, which tracks A shares on the Shanghai and Shenzhen exchanges, similarly advanced by just a whisper – 0.19 percent -- to close at 2143.

The government’s August inflation report, which beat a Bloomberg survey estimate of 5.3 percent, contrasted with a parallel report Wednesday that China’s producer inflation index rose to 10.1 percent in August from 10 percent in July.

Producer Price Index (PPI) rose as price hikes for fuel and power seeped into the costs of manufacturing, said a Merrill Lynch economic analysis.

The analysis also said a slower rate of increase for food prices contributed to the Consumer Price Index (CPI) decline. Food prices climbed 10.3 percent year-on-year in August versus 14.4 percent in July.

Merrill Lynch revised down its CPI forecasts to 6.5 percent from 7.5 percent for all of 2008, and to 4.1 percent from 5.8 percent for next year.

Meanwhile, despite official reports about Chinese retail sales, consumption growth has slowed in China, said Stephen Green, head of research at Standard Chartered (Bank) Ltd.

“We see a wealth of evidence -- slowing car sales, falling revenues for major electronics retailers” and a decline in home buying, said Green. “With PPI still heading up, then, this means the pain is increasingly being borne by corporate China, as it cannot pass on higher costs to retail customers.”

Recent semi-annual financial reports showed mixed results for Chinese firms. Earnings in certain sectors including airlines, petrochemicals and power generators declined disproportionately due to state price controls on refined oil products and electricity.

Green said China is moving “much closer to the time when Beijing decides inflation is not an issue anymore,” and the government relaxes a tight monetary policy in place since last year.

As a result of state credit tightening, thousands of small- and medium-sized enterprises have been hard hit. Some have declared bankruptcy. The pain is evident across the country, but a large number of struggling SMEs are in eastern and southern China.

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