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Cost declines fuel deflation fears

THE cost of living and production in China continued to decline last month from a year ago, fanning concerns of further deflation.
However, economists said China should wait until economic policies take full effect before implementing other measures to boost the economy.

The Consumer Price Index, the main gauge of inflation, fell for the third consecutive month in April by 1.5 percent on a yearly basis, the National Bureau of Statistics said today.

The drop was mainly driven by price retreats in food and commodities after the CPI logged contractions of 1.2 percent and 1.6 percent in March and February respectively.

Meanwhile, the Producer Price Index, the chief measure of factory-gate inflation, dipped 6.6 percent year-on-year last month, further sliding from the drop of 6 percent in March. Bloomberg News said it was the biggest drop since 1999 when it began collecting data.

Falls in both figures were in line with market expectations when the global financial crisis still gripped the world economy. But officials and analysts have sung a relatively optimistic tune about the situation in China, the world's third largest economy.

"Deflation continued in April across both upstream and downstream routes. Consumer prices may fall further in the coming months as the cost drop in production will spill over to consumers," said Wang Qing, a Morgan Stanley economist.

"However, while deflation has created room for further monetary easing, more evidence of green shoots in economic activity, rapid loan creation in the first quarter and a recovery in the stock and property markets have reduced the urgency for further immediate policy moves," Wang added.

Deflation is the dread of economists because it can hurt consumption as people wait for prices to fall which in turn reduces economic activities, squeezes corporate margins and prompts wage cuts.

Su Ning, vice governor of the People's Bank of China, said today at a forum in Shanghai that China's economic performance was better than expected but the country should be wary of the risk of deflation.

"China's massive stimulus package has begun to take effect and the nation has delivered a better-than-expected economic performance so far," said Su. "The central bank will continue to carry out a relatively loose monetary policy. We have to deal properly with the pressure brought by deflation in order to secure development and make it sustainable."

China's gross domestic product grew 6.1 percent in the first quarter from a year earlier. Despite being the weakest growth since at least 1992, it raised hope that China's slowdown may be bottoming out thanks to the 4-trillion-yuan (US$586 billion) stimulus package launched last November.

Li Maoyu, an analyst at Changjiang Securities Co, said although the April CPI and PPI figures pointed to traces of further deflation, people should not rely too much on the implication, as it was partly a result of last year's fluctuations.

China's CPI and PPI were running at a record high level last April when the country was worried about an overheated economy. The global financial crisis, which emerged in the second half of last year, began to take a toll on China's development afterwards.

The National Bureau of Statistics is set to release the April figures for fixed asset investments tomorrow.


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