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Deflation rears its ugly head

By Chen Jia (China Daily)

08:09, September 18, 2012

Average output of China's crude steel stood at 2 million tons a day, with the industry being plagued by excessive production compared with the shrinking market demand. The National Bureau of Statistics reported a lower-than-50 manufacturing Purchasing Managers Index in August. It fell from 50.1 in July to 49.2, its lowest level since November 2011. Anything below 50 indicates contraction. [Photo/China Daily]

China's rapidly slowing consumer inflation and falling industrial output prices are a potent reminder to economists of the potential risk of deflation, a sign of recession regarded as worryingly negative.

"Deflation" means a constructive decrease in the price of goods and services over a relatively long term.

Concerns about it started in June when the Consumer Price Index dropped to less than 3 percent for the first time in more than three years.

The annual CPI, a main gauge of inflation, bounced back to 2 percent in August, ending a five-month straight decline, according to the National Bureau of Statistics.

In July, the year-on-year CPI growth reached 1.8 percent, the lowest since February 2010, compared with 2.2 percent in June. That was the first time the figure fell to less than 2 percent in 30 months.

"The Chinese economy is now facing a situation of disinflation, a slow-down in the inflation rate, but not deflation - when the inflation rate falls to less than zero," said Sun Lijian, deputy chief of the Economic School at Fudan University in Shanghai.

It is likely inflation may bounce back soon in the coming months because growth in money supply is high while the development of the economy is slowing, a situation that can lead to excess liquidity, said Sun.

In the first six months of this year, the growth of broad money supply, which is known as M2, was 13.6 percent, while the gross domestic product increased by about 7.9 percent during the same period, data from the National Bureau of Statistics showed.

Sheng Laiyun, an NBS spokesman, said it was impossible for China to face deflationary risks because the economy is developing at a "healthy" rate.

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