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The latest statistics on economic activity in July apparently
defy previous concerns that
deflation may soon return.
Impressive trade and investment growth figures and a comfortably low
consumer price index (CPI)
indicate the economy has fared
quite well so far this year.
But if the economy is to remain healthy, policy-makers must pay greater
attention to rising oil prices - a strain that has yet to be fully
recognized.
The 9.5-per-cent growth in gross domestic product (GDP) in the first
half of this year was not enough to convince foretellers of deflation.
With their gaze set on slowing year-on-year investment growth and a
decline in the CPI in the second quarter, some domestic economists warned
of a return to deflation, not in the rest of this year, but in the next
two years.
Given the increasing oversupply of most products in the domestic market
and drastic measures the government took to counter property "bubbles"
early this year, such an argument is justified. Overcapacity in most industries and
inadequate investment and consumption in the property sector could easily
throw the country back into a period of deflation.
But the economy appears not to have slipped back, as second quarter
statistics suggest.
In July, trade volume reached US$120 billion, with a trade surplus of
US$10.4 billion, the second largest total the country has ever registered
in a single month. Urban fixed-asset investment rose by 27.7 per cent
year-on-year and the CPI climbed from 1.6 per cent in June to 1.8 per cent
last month, putting the brakes on the downward spiral of the leading
inflation measurement.
Besides these signs of growth momentum, the central authorities' recent
notice of banks' falling loans and the emerging impact of the
credit squeeze on the property
sector a key growth engine for the national economy are all precautionary
tales warning of possible economic slowdown.
The economy is likely to keep pressing
ahead at its current brisk pace that has been maintained for the
past 25 years, in the absence of the disturbing oil factor.
As prices at domestic petrol pumps are still essentially fixed by the
authorities, the real sting of soaring oil costs has not been fully felt
nor thus properly reflected in the growth outlook.
But the spreading shortage of oil at some economic powerhouses across
the country shows the existing pricing mechanism has failed to meet the
demands of the market.
A spike in domestic oil is
inevitable as international prices keep hitting new records, and show no
sign of dropping back in the near future. Domestic oil prices must be
allowed to rise to restore a balance between supply and demand.
Higher petrol prices will hit hard, even though drivers are a
relatively affluent group. Price rises will put a considerable
dent in the country's efforts
to boost domestic consumption.
Expensive energy will further shrink domestic enterprises' profit
margins, and therefore discourage investment.
Policy-makers will not be happy to be forced to face such a situation.
The pump price authorities have tried hard to control is lower than what
refiners need to cover production costs and what car drivers will pay to
fill their empty tanks.
As economic expansion increasingly tests the country's energy and
resource limits, policy-makers should come up with measures that allow the
economy to absorb rising energy costs.
Delaying admitting the real situation and failing to take decisive
action now will give runaway
oil prices free rein to hurt
the economy later.
(China Daily) | 
Updated: 2005-08-18 10:14
