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2009-02-11 | All chapters

Economists warn of China deflation
Kathrin Hille, Financial Times, 10th February 2009

China faces a bout of deflation, economists warned on Tuesday as data revealed that inflation dropped to its lowest in 2½ years in January and that the price of goods leaving factory gates fell 3.3 per cent in January.

In the latest sign of economic weakness in the country, consumer price inflation fell for the ninth month in a row to 1 per cent in January from 1.2 per cent the previous month as prices for clothing, transport and housing tumbled.

China faces a bout of deflation, economists warned on Tuesday as data revealed that inflation dropped to its lowest in 2½ years in January and that the price of goods leaving factory gates fell 3.3 per cent in January.

In the latest sign of economic weakness in the country, consumer price inflation fell for the ninth month in a row to 1 per cent in January from 1.2 per cent the previous month as prices for clothing, transport and housing tumbled.

Several economists forecast that consumer prices in China would begin to fall from this month.

Ha Jiming, economist at China International Capital Corporation, said inflation would be minus 1 per cent in February and factory-gate prices would decline 6.3 per cent.

However, most analysts say that China will avoid a prolonged period of deflation, which could lead to a sharp drop in output as consumers and companies delay spending, because of the aggressive monetary and fiscal stimulus policies introduced by the Chinese authorities.

The government has abandoned quotas for new credit growth and has urged state-owned commercial banks to help finance a Rmb4,000bn (£404bn, $586bn) fiscal spending plan over two years.

State media reported this week that new loans issued in January reached Rmb1,200bn, which, if confirmed, would represent the third month in a row of sharply higher credit expansion. Economists expect the Chinese central bank, which has cut interest rates five times since September, to ease monetary policy further.

Even if prolonged consumer price deflation is avoided, economists said that the drop in prices of goods leaving at the factories level was likely to depress further corporate profits, which are an important source of funding for investment in China. Producer prices could fall by as much as 10 per cent, said Yu Song at Goldman Sachs, which “would make industrial profits look very bad”.

McDonalds, the world’s largest fast-food chain, said last week that it was cutting the prices on some of its meals in China by as much as one-third to attract customers to its 1,050 restaurants across the country.

Meanwhile, Zhou Xiaochuan, the head of China’s central bank, stressed the need for the global financial system to reduce its dependency on the dollar. Countries should “steadily push toward diversification in the international monetary system in the long term,” he said.

Source: http://www.ft.com/cms/s/0/4383731c-f723-11dd-8a1f-0000779fd2ac.html