OPINION> Commentary
High risks of low prices
(China Daily)
Updated: 2008-12-12 07:43

A lower-than-expected consumer price index (CPI), the latest sign that the Chinese economy is cooling more rapidly than most people have expected, is indeed a cause for caution, but not for panic.

With Wednesday's figures showing the country's wholesale inflation plummeting and exports falling year-on-year for the first time in seven years last month, many economists have rushed to further slash consumer inflation forecasts. They originally predicted that consumer prices would gain at least 3 percent after rising 4 percent in October.

Yet, the November CPI released yesterday obviously caught most of them in surprise. Inflation in the country eased for a seventh straight month to 2.4 percent, the lowest level in 22 months.

Such a sharp fall in consumer inflation should certainly add to our worries when the country is racing to prevent a severe downturn of the national economy.

Just half a year ago, Chinese policymakers were busy with reining in investment, taming prices and preventing the world's fourth-biggest economy from overheating.

Now, they have to try very hard to stimulate economic growth by aggressively cutting interest rates and rolling out a $586-billion spending package.

If the decline in prices persists and triggers a vicious spiral of falling profits and shrinking employment and incomes, it will become much more complicated for the country to rev up the economy.

The case looks even more precarious when one takes into consideration the recent collapse in Chinese exports. The export sector has long served as a powerful growth engine for the Chinese economy. If a prolonged export contraction ensues, a rise in domestic supply of products originally manufactured for the international market will likely exert further downward pressure on domestic prices.

Moreover, the country's inflation is also poised to fall further when the authorities cut down domestic gasoline prices to reflect the plunge of international oil prices in the face of a global downturn.

The risk of deflation is real and imminent. But it does not justify too much pessimism about the Chinese economy.

The healthy fundamentals of the economy and the strengthened fiscal position will enable the country to prepare for the worst.

What we need is a firm grasp of the severity of the situation and a strong confidence in the government's determination and efforts to boost domestic demand. With that in place we can - and will - head off deflation and continue our long-term growth trend.

(China Daily 12/12/2008 page8)