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Slight deflation demands easy monetary policy

CHINA should continue its easy monetary policy because of slight deflation but the economy is still likely to be 8.5 percent higher in the third quarter from a year before, the State Information Center said today.

The research unit of the National Development and Reform Commission, China's top economic planner, estimated the consumer and producer prices will stay negative in the July-September period.

The Consumer Price Index, the main gauge of inflation, may end the third quarter 1.3 percent down from a year earlier, while the Producer Price Index, the factory-gate inflation measurement, may be 7.9 percent down on last year, the center said.

China's CPI was 1.8 percent lower in July than last year, the six straight month of negative comparisons, while July's PPI was 8.2 percent down, settling in the negative for eight straight months.

In the first seven months, the CPI decreased 1.2 percent on an annual basis while PPI lost 6.2 percent.

"The extending declines in CPI and PPI illustrate that China is amid a period of slight deflation, which makes it possible for China to continue a relatively loose monetary policy," chief analyst at the center Fan Jianping said.

"A stable policy stance is important to solidify the achievements gained through previous stimulus measures. Even with fine-tuning, it should leave enough room for return of changes and be careful not to cause negative anticipation."

The People's Bank of China mentioned in a report earlier this month that the central bank was considering fine-tuning monetary policy to avoid risks possibly hidden in the huge new yuan loans issued so far this year.

It later clarified that by saying that it would not set quotas on new loans to rein in liquidity and any fine-tuning did not mean a shift in the current policy stance.

China's banks have lent a record 7.73 trillion yuan (US$1.13 trillion) in the first seven months, a jump of 173 percent from a year ago. It has already surpassed the 5-trillion-yuan target for this year set at the start of the year.

Growth of new yuan lending slowed significantly last month by hitting a nine-month low of 356 billion yuan, reflecting the government's concern of the swelling loans.

The center also said investment would play a bigger role in bolstering the economy in the third quarter. But the country had to shift from the government-driven investment to those initiated by companies.
China's gross domestic product increased 7.9 percent in the second quarter, accelerating from the growth of 6.1 percent in the first three months.


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