Economy

Markets

Industries

Insights

Reports

Events

Oh! For an economic road to recovery

By Qi Jingmei (China Daily)
Updated: 2009-03-28 13:49

The consumer price index (CPI) fell to 2.5 percent in the fourth quarter of 2008 because of falling demand and the government's macroeconomic policies. The figure is much lower than 4.8 percent, the average forecast for the whole of last year. The CPI dropped in the first two months of this year, too, because of the deepening global financial crisis and continuing fall in demand. In fact, prices of many products are not expected to rise any time too soon.

And all these raise the specter of deflation over the economy.

That is exactly what Wen Jiabao intended to avoid when he said the CPI growth rate would be kept just below 4 percent. The effort, spelled out in his work report to the 11th National People's Congress earlier this month, will prevent the national economy from sliding further and help maintain the confidence of producers and consumers in the market.

Related readings:  Wen: 8% GDP growth goal achievable  China to see early recovery ahead of global economy  China's PPI down 4.5% in February  China CPI falls 1.6% year-on-year in February

The worst drought in more than half a century and government measures to help farmers are likely to push up grain prices this year. A rise in grain prices would mean a rise in CPI, too.

It is true that government regulations not only checked the rising prices of pork and grain last year, but also helped bring them down. Grain and pork prices, however, have remained steady for the past few months and are not expected to fall this year. That means even though the CPI has dropped drastically since May last year, it is expected to increase gradually this year.

But it would be wrong to presume that the battle has already been won. The government still has to take steps to increase the reserves of agricultural products such as grains, cotton, edible oil and pork. It has to ensure that farmers and producers get fair prices for their products and that their interests are not compromised.

The government, Wen said in his work report, plans to reform the pricing mechanism of resource-related products this year and take steps to levy charges for environmental protection. The second move is long overdue because massive resource exploitation and environment damage are the prices we have paid for rapid development. Hence, these times when prices are falling continuously seems apt for imposing an environmental protection fee on producers.

The shift of the resource-pricing mechanism from government control to the dictates of market economy will cause prices of some products such as energy, raw materials and industrial products to rise in the short term. Besides, the charges for environmental protection and use of resources will increase the cost of resource-based products, and in effect resource prices as a whole.

To check the economy from sliding further, the government in September adopted active fiscal and moderately loose monetary policies, cutting the benchmark interest rate several times and easing conditions for small- and medium-sized enterprises to get loans. The moves have yielded results, for the amount of new loans issued by banks in January and February alone reached 2.7 trillion yuan ($395 billion), more than half of the 5 trillion yuan for the whole of last year. This will increase fluidity in the market this year, which in turn push up prices.

Among the other steps taken by the government to boost the economy is the $586 billion stimulus package and new policies to reinvigorate 10 industries in order to raise domestic demand. And then, accelerated tax reductions and tax and revenue reform will add to the vitality of the country's micro-economic operation.

Moreover, the government will continue to stick to a moderately loose monetary policy to ensure that enough loans are issued to meet the country's economic development demand.

Effective steps have been taken to boost falling demand in the domestic market. The government has decided to intensify the reform to narrow the income gap between the rich and the poor and the urban and rural populations. Subsidies to farmers have been increased in order to tap consumers' potential in rural areas and improve rural residents' livelihood.

Such robust macro-economic regulations are expected to take China on the road to economic recovery earlier than other countries, for strong production and consumption demand is likely to raise prices and ease fears over a possible deflation.

The author is a senior economist with the State Information Center.