* Record monthly trade surplus as import growth flags
* Exports show resilience for now but likely to weaken
* Inflation hits 17-month low, presaging interest rate cuts
By Simon Rabinovitch and Zhou Xin
BEIJING, Nov 11 (Reuters) - Chinese import growth slowed in October and inflation fell to a 17-month low as domestic demand cooled, making it likely that Beijing will cut interest rates soon to back up the government's huge new economic stimulus plan.
Imports last month rose 15.6 percent from a year earlier, well below expectations of 19 percent growth, customs data showed on Tuesday.
Exports rose 19.2 percent, beating market forecasts of an 18.8 percent rise, despite a sharp slowdown in Western economies and widespread factory closures in southern China.
"Domestic demand is dropping faster than external demand in China," said Tao Wang, UBS's economist in Beijing.
Exports would wilt as the world sank into recession, Wang said. "But at this stage much of the slowdown in China has been coming from domestic investment, especially related to construction. The much talked-about export shock has not really hit China yet," she added.
The result was an October trade surplus of $35.24 billion, smashing September's record of $29.36 billion and providing a stark reminder of the imbalances plaguing the global economy.
That issue will be on the table when leaders of the G20 group of rich and developing countries meet in Washington on Saturday to examine the causes and effects of the global financial crisis.
Most economists expect China's exports to weaken once remaining pre-Christmas orders have been shipped, but Zhou Xi, an analyst with Bohai Securities in Tianjin, thinks they will prove more resilient than many expect.
"A lot of Chinese exports are daily necessities and are not sensitive to the economic cycle," Zhou said.
OVERCAPACITY
Inflation figures for October also cast a light on weakness in the world's fourth-largest economy that prompted the government to rush out a 4 trillion yuan ($586 billion) package of spending and investment on Sunday evening.
Consumer prices rose 4.0 percent in the year to October, down from September's reading of 4.6 percent and below market forecasts of 4.2 percent. It was the sixth consecutive monthly decline in the annual inflation rate.
Food prices, which make up a third of the consumer basket, rose 8.5 percent in October from a year earlier, slowing from an increase of 9.7 percent in the 12 months to September, the National Bureau of Statistics said.
Core inflation excluding food also fell, to 1.6 percent in October from 2.0 percent in September, possibly pointing to overcapacity in manufacturing. Clothes and cars both were cheaper last month than in October 2007.
"It shows that the Chinese economy is in a sharp slowdown -- production is falling, so is demand," said Zhang Yongjun, an economist with the State Information Centre, a government think tank in Beijing.
With inflation well below February's 12-year peak of 8.7 percent, economists agreed that policy makers can put aside inflation worries and bend all their efforts to boosting growth.
China's cabinet on Sunday announced a shift to a moderately easy monetary policy, reinforcing expectations that more interest rate cuts are on the way. The People's Bank of China has already reduced borrowing costs three times since mid-September.
DEFLATION THREAT
"The increasing risk of deflation will make the central bank more aggressive in loosening monetary policy," said Hu Yuexiao, an analyst with Shanghai Securities.
If prices keep falling at their current pace -- they were down 0.3 percent in October from September, the third consecutive month-on-month drop -- then China could experience deflation as early as February for the first time since 2002, Hu said.
Outright price falls are a scourge because they mean producers have to sell more goods to generate the same revenue, thus increasing the real, or inflation-adjusted, burden of their debts. Deflation also prompts consumers to hang back in anticipation of ever-lower prices.
"The possibility of deflation cannot be excluded," said Jiang Chao, an analyst at Guotai Junan Securities in Shanghai. He expects consumer inflation next year to average just 1 percent.
Kevin Lai, an economist with Daiwa Research Institute in Hong Kong, also thinks inflation will keep falling, but he said the government's pump-priming meant deflation was unlikely.
"Given the massive stimulus measures coming through in the next few quarters, we'll see demand continue to be quite strong, picking up a lot of slack from the excess capacity," he said.
Lai agreed that the decline in inflation gave the central bank more room to cut rates.
"In fact, if they have a stimulus package that is so big, monetary policy has to accommodate that goal by creating more liquidity and by creating a more friendly monetary environment," Lai said.
For a graphic, please click on https://customers.reuters.com/d/graphics/CN_CPI1108.gif (Reporting by Zhou Xin, Simon Rabinovitch, Jerry Hua, Michael Wei and Shen Yan; Writing by Alan Wheatley; Editing by Tomasz Janowski)