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Economists Still Fear 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.
The consumer price index (CPI), Chinese policy makers' key inflation gauge, rose only 0.2 per cent year-on-year during the first 11 months of 2000.
"We are not 100 per cent convinced that deflation is over, as the CPI did not reach the targeted 1 per cent year-on-year growth last year," said Chen Huai, a think-tank expert with the Development Research Centre under the State Council.
The foundation for China's encouraging economic performance was not solid, he said. "The overall supply and demand are still not balanced."
An earlier report from the National Bureau of Statistics indicates that more than 90 per cent of the country's industrial products are oversupplied.
Policy factors also played an important role in expanding domestic demand last year, according to Ye.
Fixed assets investments greatly depend upon government injections and in particular, treasury bonds, he said.
"Government investment could help create demand, but it usually takes time before this happens," he said.
If the government encourages private companies to spend on infrastructure, China could find a new way for its economic development.
Consumers could theoretically help pick up the demand by spending, but consumption has become an uncertain contributor in the months ahead, the statistician said.
With the aim of lifting consumer spending, the Chinese central bank has announced seven successive interest rate cuts over the past three years, having slashed interest on one-year deposits to 2.25 per cent.
A disguised interest rate cut in the form of a 20 per cent tax on income from bank deposits was also put in place in November 1999.
The central government took other measures, such as increasing salaries, providing compensation for laid-off workers and increasing pensions, to encourage spending.
The government earlier announced a consumption-boosting, week-long National Day holiday and May Day holiday.
"The central government cannot expect Chinese urban consumers to spend more because they have many more worries such as pensions, medical care and children's education," Ye said. The country has yet to establish a nationwide social security system.
The vast rural population has even less money because of the slow growth in income.
In the circumstances, the government should be more concerned about how to maintain growth, Chen said.
Stimulating an increase in social demand is an important duty of macro-economic management this year, he said
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