Economy

Markets

Industries

Insights

Reports

Events

Deflation can deceive

(China Daily)
Updated: 2009-05-12 07:52

The current fall of consumer and producer prices in China can help lower cost for businesses and encourage consumers to spend.

More important, it gives Chinese policymakers greater room for maneuver to stoke a fledging economic recovery without triggering serious inflation.

Related readings:  CPI declines, but deflation fears ease  Specter of deflation looms again  'No risk of deflation, loans to top 5b yuan in 2009'  China's central bank warns of near-term deflation

China's consumer prices dropped 1.5 percent in April from a year earlier, after falling 1.2 percent in March. Meanwhile, producer prices fell 6.6 percent year on year.

The fact that consumer prices fell for a third month on food and commodity cost shows China is still in deflation.

Innocuous as it may seem, the current decline in prices should not lead Chinese policymakers to lower their guard against inflation risks.

Admittedly, there will be no question of inflation before the base effect finally fades off later this year.

In April 2008, inflation was as high as 8.5 percent because both food prices and energy prices had skyrocketed.

Now, domestic pork prices have tumbled close to a level that may trigger purchases by the government to uphold farm incomes. And, international oil prices remain below the half-way mark of the peak price last July.

Though the Chinese economy has shown tentative signs of bottoming out, it seems unlikely that China's recovery will be strong enough to inflate global commodity prices while most other major economies remain sluggish.

In the absence of immediate inflationary risks from the global market, China can continue to pump more liquidity into the market to stimulate investment and consumption.

Nevertheless, the surge of bank loans has already sounded the alarm for Chinese policymakers.

After granting 4.58 trillion yuan in new loans in the first quarter, Chinese mainland banks added about 600 billion yuan in lending last month, sparking worries about the quality of new loans.

Caught between the need to ensure ample supply of money to sustain growth and the task to prevent bad loans, Chinese policymakers can only step up the warning on the quality of lending with words, but not deeds.

The current deflation allows policymakers to wait and watch for a while. If deflation deepens further and begins to sap the country's ability to bounce back, more bank loans may become necessary to sustain economic growth.

Yet if prices stop falling, policymakers should move quickly to rein in the flood of money being poured into the economy.