Deflationary Threat Still Looms Ahead

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Last updated at: (Beijing Time) Thursday, March 14, 2002

Deflationary Threat Still Looms Ahead

China's consumer price index (CPI) remained unchanged in February compared with the same month last year. The CPI situation suggests the Chinese economy still faces deflationary pressure. Experiences suggest increasing salaries, providing compensation for laid-off workers, increasing pensions for retirees and announcing week-long National Day and May Day holidays to boost domestic consumption.

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China still facing deflationary pressure

China's consumer price index (CPI) -- one of the policymakers' key economic gauges -- remained unchanged in February compared with the same month last year, according to the National Bureau of Statistics Wednesday.

However, in the first two months of the year, the CPI dropped 0.5 per cent compared with the same period last year, the bureau said.

"The CPI situation suggests the Chinese economy still faces deflationary pressure,'' said Hu Shaowei, a senior economist with the State Information Centre.

He said part of the pressure comes from low-priced foreign products, including oil and raw materials which have begun to flood the Chinese market following the country's entry into the World Trade Organization.

"This constitutes additional pressure on the market, which has already suffered an oversupply -- another factor for the deflationary pressure,'' Hu said.

80% China-made products oversupplied

Zhang Xueying, another senior economist with the centre, said more than 80 per cent of China-made products are oversupplied.

"This situation will not change much in the short term, because the country has yet to create new products and new areas for consumption and investment,'' Zhang said.

Presently, the policy factors still play an important role in expanding domestic demand, he added, claiming fixed asset investments greatly depend upon government injections and, in particular, treasury bonds.

Consumers could, theoretically, help boost demand by continuing to spend, but consumption has become an uncertain contributor in the months ahead, the economist said.

Measures taken to stimulate domestic economy

With a move to stimulate domestic spending, the central People's Bank of China has announced an interest rate cut eight times since 1996, slashing the real interest on one-year deposits to approximately 1.6 per cent.

Yuan Gangming, a senior economist with the Chinese Academy of Social Sciences, said the impact of the continued interest rate cut will be very limited.

Experiences from the past five years suggest it was other government measures -- such as increasing salaries, providing compensation for laid-off workers, increasing pensions for retirees and announcing week-long National Day and May Day holidays -- not interest rate cuts that have helped boost domestic consumption.

"The central government could not expect Chinese consumers to spend further, as they have much more to worry about, including pensions, medical care and children's education,'' he said.

The vast rural population, which have a higher consumption desire, does not have enough money because of the slow income growth in recent years.

Yuan said the government should consider a tax cut to stimulate domestic investment and consumption.

Qiu Xiaohua, deputy director of the National Bureau of Statistics, earlier said that the country is considering a structural tax cut in certain areas to stimulate economic development this year.

The tax cut, as part of the country's proactive fiscal policy, in the past years has not played a large role in economic development compared with the issuance of treasury bonds aimed to increase expenditure, Qiu said.

China's Deflation

Economists fear the Chinese economy is still facing deflationary pressure despite some experts voicing fears that the country's consumer prices would rise by a big margin this year.

"The evidence is still weak that China has finally pulled out of its fight against deflation, even though the country's economy has taken a turn for the better," said Ye Zhen, spokesman for the National Bureau of Statistics. >>details

About CPI

The Consumer Price Indexes (CPI) program produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services.

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