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Experts: Economy may fall into deflation
Updated: 2005-08-01 09:18

A hot debate on whether China's economy is turning cold is underway around the country's economic circle since this spring. At the second China economic observation forum, some economists predict that China's economy may fall into a deflation characterized by persistent consumer price decrease.

Lin Yifu, Director of China Center for Economic Research (CCER) of Peking University, said at the forum held quarterly by CCER that owing to the overproduction in most manufacturing sectors since 1998 and the to-be-overcapacity from over-investment in some sectors in 2003 and 2004, China is expected to see deflation caused by overcapacity in the latter half of 2005.

Wang Jian, Deputy Secretary General for the Economic Research Institute under State Development and Reform Commission, said that decreasing growth of Consumer Price Index (CPI), dropping enterprise profits, as well as losses in downstream industries areall signals that China's economy has taken a cooling trend.

According to Wang, China's economy has reached the middle phase of the highly-growth cycle driven by heavy industry investment since 2003. So the investment is expected to fall in 2006 despite a continuing rapid growth, he said.

As for the consuming sector, because this year's good harvest may result in somewhat decrease of farm produce prices, Chinese farmers, accounting for China's largest population, is expected to see their net income growth of this year lower than that in last year, which will limit the expansion of the domestic demand to a large extent, said Wang.

On the other hand, the lower expectation of this year's economic growth in Japan, the European Union and the United States for such factors as soaring oil price will also lead to the decrease of China's export expectation, he said.

As a result, with this cycle of investment tide draws to a close in 2007, most new capacity will be put into production and it is inevitable to see over-supply and price decrease then, said Wang.

According to Yuan Gangming, research fellow of the Center for China in the World Economy of Tsinghua University, still keeping a rapid growth, China's investment will fall with dropped prices of consumer goods, industrial goods and expected dropping of that of raw materials.

China's economy has been in the alert zone of deflation, said Yuan.

Professor Song Guoqing of CCER has the same worries. Through data analysis, Song demonstrated that the 9.5 percent growth of China's GDP in the first half of this year was driven by the growth of favorable trade balance to a large extent as the real growth of domestic demand is only 3.5 percent.

With cooling investment in real estate industry, and pessimism on favorable trade balance growth caused by decreased demand of overseas market, acuter trade frictions and RMB appreciation, China's economy tends to be cooler in a short term, said Song.

So there is possibility of weak demand and so deflation in certain period of time, said Song. But he predict the deflation will not last long.

Lin also said that caused by overproduction capacity, the possible deflation will not drive the economy down much in one or two years, despite it will do bring some bad effects on the country's economic operation.

He suggests that China should make more efforts in expanding domestic demand, especially the purchasing power of farmers by supporting infrastructure construction in rural areas and giving more opportunities for farmers to work in urban areas to increase their income.

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