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July 17, 2009

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Home » Business » Economy

CPI drops for 5th month and posts biggest decline

CHINA'S consumer prices posted the biggest drop last month since 1999, or the fifth straight monthly decline, the National Bureau of Statistics said yesterday.

Economists said a deflationary spiral is unlikely and inflationary pressure is seen to rise due to China's sizzling credit growth, economic recovery and rising prices of commodities globally.

Last month's Consumer Price Index, the main gauge of inflation, fell 1.7 percent year on year, falling further from May's 1.4-percent decline. The CPI slid 1.1 percent in the first half this year.

Meanwhile, China's Producer Price Index fell 7.8 percent last month from a year ago, declining for the seventh month in a row. The PPI tumbled 7.2 percent in May and lost 5.9 percent in the first six months.

"The weakness in inflation is hardly surprising, and is also being seen in other economies around the Asia Pacific region," Daniel Melser, Moody's's senior economist, said yesterday. "In China, it reflects slackness in domestic demand."

However, economists said the overall risk of a deflationary trap for China appears slim.

The high price levels a year ago helped contribute to the current bout of price declines although the prices of global commodities rose this year.

The global crude oil prices have gained 67 percent this year. Copper prices rose 73 percent to more than US$5,100 a ton this year.

The PPI continued to ease in China despite the recent hike in world oil prices as it will take a while for the increase in global commodity prices to trickle down to Chinese prices. Economists said eventually it will put upward pressure on prices.

Li Xiaochao, a statistics bureau spokesman, said the agency will closely monitor the rapid credit growth, which is related to prices.

Banks in China extended 7.37 trillion yuan (US$1.08 trillion) in new yuan lending in the first half, up 4.92 trillion yuan from a year ago. It already surpassed the credit target of 5 trillion yuan at the start of this year and economists said China's new yuan lending this year can easily surpass 10 trillion yuan.

But there are concerns the ballooning credit will fuel asset prices, which is already seen in China's stock and real estate markets.

"As the domestic economy gathers momentum, upward price pressure will resume, and the country is not at risk of falling into a deflationary spiral," said Tine Olsen, a Moody's economist.

China's economy seems to be recovering as it grew 7.9 percent in the second quarter, pushing the first-half expansion to 7.1 percent.


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