Economic Outlook: Government, not Market, Trying to Stop Deflation

Since the start of summer, prices of air conditioning, color televisions and cars have all dropped. Some of the changes in prices were decided by the factories and others by the retailers. People can't help but ask, "Will the prices go back up before the end of this year?"

For the past two years, the Chinese government has issued Treasury bonds, increased infrastructure construction, increased the lower and middle class' income in an attempt to increase domestic demand, spurring economic growth. For various reasons, the increase in demand has been inconsistent, but in the first half of this year, consumer spending started to pick up. Retail sales increased 10.1% compared with the first half of last year. After consumer prices continued to drop for two consecutive years, they are starting to bottom out. During the first half, consumer prices were 0.1% higher than the first half of last year.

Although this is a minute figure, China's economists place a lot of value on it. The reason being, the government's investment into infrastructure construction will spur economic growth for a limited time. Only an increase in consumer spending will induce private investments and maintain fast economic growth.

After going through years of inflation, China's prices continued to drop. The price of produced goods started to show a negative growth in April 1996 and dropped for forty-five consecutive months, until November 1999. The consumer price index started to plunge in March 1998 and fell for twenty-two consecutive months, ending December 1999. In 1999, retail prices dropped 3% compared to 1998. That same year, consumer prices fell 1.4%. The term "deflation," which had been unfamiliar to many Chinese, soon became a hot topic in the media and in economic circles.

During this period of deflation, the rising prices scared many Chinese consumers. People rushed to buy refrigerators that didn't refrigerate and air conditioners that didn't work. They had grown accustomed to prices dropping for twenty-something consecutive months, but didn't realize that the decline in prices was hindering economic development.

Economists say that when the prices drop for long periods, the enterprises aren't able to see where the demand is and don't know where to invest. Consequently, raises in workers' salaries, the companies' growth and government revenue are affected. If the farmers' income is affected due to a drop in agricultural product prices, consumer demand from rural villages will suffer.

One official from the State Planning Commission said, "We do not hope that there will be high inflation, but we also do not hope that the aggregate level of prices continue to drop. There at least needs to be a reasonable rebound in prices for there to be confidence in the economic development."

The increase in consumer prices this year has been influenced by the weather. The prices of vegetables have risen by a larger degree. Some production and service sector have had big increase in prices due to government policy and the rising prices of crude oil on the international market. Increases in rent, standard of living, education and child care costs and health care costs have raised the prices of housing and services. This shows that the major reason for the increase in prices is the government adjusting prices, not because of the market.

During the first half, most food prices and industrial consumer goods prices continued to drop, reflecting the disparity between supply and demand. According to a government survey of 610 commodities, supply was greater than demand in 78.4% of the commodities polled and the rest had a balance between supply and demand. None of the goods had a greater demand than supply.

Thus, it's not difficult to see, although there has been positive changes in prices, the foundation of a rebound in prices isn't firm due to the supply being greater than demand. There are many Chinese economists who worry that China will not be able to escape the shadows of deflation by the end of the year.

They feel that China should take this opportunity now, when it's economy is starting to turn around, to continue the series of measures to expand domestic demand.



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