Transformation, not stimulation

The newly issued Consumer Price Index (CPI) of June droppsed to 2.2 percent in June, the lowest a new low inrate for 29 months. The iInflation pressure is gradually disappearing, says an article in Beijing News. Excerpts:

There are three reasons behind the dropit. Firstly, the monetary expansion is slowing down. The growing speed of M2 droppeds from 20 percent to 13 percent. The growing speed of M1 declineds from double-digit numbers to 3.5 percent. Secondly, China's GDP growth sloweds down and the overall social demand is shrinking, leading to excess production capacities in many industries. Thirdly, the US dollar appreciateds for several consecutive months consecutively and, whichthat dragsged down the com-modity prices in the world market. 

So the Chinese economy may experiencenter deflation soon. The question is, how to stimulate the economy without triggering new inflation.

Injecting money is an effective way for immediate effects. Bbut it also causes so many side- effects for the long-term fitness of the national economy. So if there is no system reform, the stimuluslative package can only help the Chinese economy meet its urgentimmediate needs.

The State Council issued important notices recently emphasizing the importance of promotencouraging private capitals to participate into real economic fields, many of which used to be monopolized by State-owned enterprises.

This important message from the central authority suggests China will consider activating its market reform further instead of onljusty releasing money to boost its economy. Cutting tax for residents and enterprises is a good starting point to translate this message into real changes.

The looming deflation just provides the Chinese economy with a good opportunity to transform its economic structure.