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Rise in CPI is good news for economy
( 2003-10-08 14:34) (Hk Edition)

A rebound in the consumer price index (CPI) in August has encouraged economic researchers to confidently predict that the Chinese economy is set to finally shake off a nearly two-year-old price slump this year.

A rise in CPI, a key gauge of inflation, suggests higher prices that consumers have to pay but also means a stronger market demand.

For the Chinese economy which has been combating lingering deflationary pressure, characterized by sluggish consumer demand, the CPI gain is undoubtedly good news.

Liang Hong, an economist with Goldman Sachs (Asia), said the Chinese economy is gradually moving away from persistent deflation, or falling prices.

In its report released recently, Goldman Sachs revised its forecast of inflation from 0.5 per cent to 0.9 per cent for this year.

The CPI is projected to grow by a further 1.5 per cent in 2004, the report said.

The optimistic prediction came after the National Bureau of Statistics (NBS) announced a year-on-year CPI increase of 0.9 per cent in August. It was up 0.7 percentage points over the previous month.

The index recorded an average gain of 0.6 per cent year on year in the first eight months, according to NBS figures.

The economic data showed that the CPI has maintained an upward spiral despite a slowdown caused by the sudden outbreak of SARS (severe acute respiratory syndrome) between April and July.

The CPI posted a year-on-year rise of 1 per cent in April but slowed down to 0.7 per cent in May and then dipped respectively to 0.3 per cent and 0.5 per cent in June and July.

Based on the quick pickup in the CPI, economic researchers have even estimated an increase of at least above 1 per cent for the full year.

But Yao Jingyuan, chief economist with the NBS, appeared more cautious in predicting an end to the price slump since November 2001.

He stressed that the CPI is almost certain to see a moderate increase this year but may not be as high as Goldman Sachs has forecast.

Yao admitted that he himself is "not very confident" about a further stable growth in the CPI as there is no solid basis to support a continuous price gain in the next few months.

For instance, the price jump over the past few months was mainly based on seasonal factors and was pushed up by soaring prices for food and vegetables.

Meanwhile, the worsening unemployment situation, stagnant rise in farmers' incomes and the oversupply of most commodity items will also restrain the CPI from gaining further.

What's worse, the price increase for industrial products and raw materials has slowed since March.

Given the mixed messages, Yuan Gangming, a researcher with the Institute of Economic Studies at the Chinese Academy of Social Sciences, noted that the CPI trend will mainly depend upon the government's macro-economic policy.

"If a relatively-loose monetary policy can be maintained, the economy will be able to walk out of deflation," the researcher said.

"Then the economy will enter a new turning point to gain momentum for further growth."

Yuan, however, indicated his worry about the central bank's policy of tightening money supply, which is aimed at fending off inflation risks.

"Due to their long-standing fear of runaway inflation, the government and monetary authorities tend to pay great attention to inflation and take precautions amid early signs, which can stave off inflation risks but always lead to deflation," he said.

Zhou Xiaochuan, governor of the People's Bank of China, strongly warned against overheating in some industries as early as July while vowing to contain price pressures.

On August 23, the central bank announced that the reserve ratio of commercial banks - the percentage of deposits that banks must hold as reserves - would be raised to 7 per cent from 6 per cent, effective from September 21.

The move was aimed at mopping up about 150 billion yuan (US$18.2 billion) from commercial banks in a bid to whittle down money in circulation and tighten fast-growing bank lending.

But some economic researchers complain that the policy may result in a tight money supply and weakening market demand, which, in turn, would drag down CPI growth.

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