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PPI drop gives rise to deflation concerns

SHANGHAI'S producer prices dropped by a wider margin in April, fueling concerns of deflation, the Shanghai Statistics Bureau said yesterday.

The city's foreign direct investment also tumbled, reflecting a still harsh global economic climate.

Shanghai's Producer Price Index, the main gauge of factory-gate inflation, fell 7.4 percent from a year earlier in April. It followed reductions of 6.8 percent in March and 6.5 percent in both February and January.

The costs of energy and raw materials declined 13.9 percent year on year last month, the second double-digit drop this year after falling 11.3 percent in March.

"The decline in manufacturing demand could spill over to consumer prices in the coming months and now we should be alert to deflation," said Li Maoyu, an analyst at Changjiang Securities Co.

Deflation occurs when consumers hold back on big-ticket purchases such as property and cars in the expectation that prices will drop further.

The city's Consumer Price Index, the yardstick of inflation, declined 1.4 percent in April. It was the third-straight month the CPI lost ground after falling 0.4 percent in March and 0.2 percent in February.

Meanwhile, the contract value of Shanghai's foreign direct investment fell 18.3 percent to US$1.2 billion in April. The number of contracts with foreign countries also dropped 17.1 percent to 238 projects.

"Overseas investors may hold funds until they see a clear sign that the global economic crisis is ending. We should be prepared for more declines in both foreign investment and exports," Li said.

Shanghai's exports in April fell 26.2 percent year on year to US$25.13 billion, compared with a decline of 16.4 percent in March.

But sustained development in the local market provided a ray of hope for the city's economy, despite the dismal outlook in external demand, analysts said.

In April, Shanghai's retail sales advanced 13.8 percent on a yearly basis after gaining 11.9 percent in March.

Fixed-asset investment increased 4.1 percent year on year to 125.5 billion yuan (US$18.4 billion) in the year's first four months.


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