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Business / Economy

China should be alert to deflation risks

(Xinhua) Updated: 2015-02-11 10:03

BEIJING - Although low inflation in January was expected by the general market, the Chinese government must remain on full alert for further deflation pressures amid signs of a flagging economy.

The consumer price index grew 0.8 percent year on year in January, the slowest pace since November 2009 and much lower than 2 percent for the whole year of 2014, according to the National Bureau of Statistics (NBS).

Naturally, people are pretty happy about it. Since the beginning of last year, inflation has remained mild, which means a rise in living cost will not eat too much into disposable incomes.

The most conspicuous benefit was for car owners. China cut gasoline and diesel retail prices 13 consecutive times between July 2014 and the end of January, following declines in international oil prices.

A drop in oil prices was one of the reasons behind the slower CPI rise last month, dragging down inflation by 0.07 percentage point, NBS statistician Yu Qiumei said.

Food price declines due to warm weather and the Spring Festival holiday were also major reasons behind the subdued inflation. The Spring Festival, or China's lunar new year, falls in February this year but was in January last year.

However, many analysts believe low inflation can serve as a metaphoric canary in a coal mine.

Nomura said in a research note that despite the holiday factor, "we believe underlying disinflationary pressures have risen, with CPI inflation easing across the board."

The disinflationary pressures reflect weakening demand in the economy and worsening overcapacity in upstream industries, the note reads.

In the case of defaltion, price declines will have negative impacts on both investment and consumption, with companies reluctant to invest due to less foreseeable profits and consumers unwilling to buy as they look for even cheeper goods.

The subsequent job loss and excessive inventory will not be that rosy for any economy.

"The January inflation data, together with trade data and PMIs, point to slower growth momentum in economic activity," Nomura said.

China's trade volume tumbled 10.8 percent in January. The manufacturing purchasing managers' index (PMI) fell below 50 for the first time since October 2012.

The institution forecast that inflation will tip up somewhat in February on the reversal of holiday distortion, but it will remain subdued in the coming months.

HSBC agreed, saying that today's data point to further deceleration in inflation and the growth slowdown in January.

It added that the central bank may ease more with another 25-basis-point cut to interest rate in the first quarter.

Nomura also said that further easing is justified and needed against a backdrop of weak growth momentum and weak inflation.

"We believe last week's RRR (reserve requirement ratio) cut was just the start of a series of further easing measures," it said.

Nomura said it maintained its call for three more RRR cuts (50 basis points each quarter) and one more 25-basis-point benchmark interest rate cut in the second quarter.

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