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Deflation pressure weakens slightly
( 2002-09-14 09:18 ) (1 )

The Chinese economy still faces deflationary pressure, though it did ease slightly in August.

The National Bureau of Statistics said yesterday that the consumer price index (CPI), a key inflation gauge for policy makers, dropped 0.7 per cent in August compared with the same month last year.

That was slower than the drop of 0.9 per cent in July.

During the first eight months, the CPI fell 0.8 per cent from a year ago, the bureau said.

"The CPI is likely to drop about 0.5 per cent for the whole year," said Niu Li, a senior economist with the State Information Centre.

But this will not hurt China's economic development, which is expected to grow more than 7.5 per cent this year, Niu said.

Zhang Liqun, a senior researcher with the Development Research Centre at the State Council, agreed, adding that the CPI drop was mainly due to imbalanced supply and demand.

Foreign products, including raw materials and automobiles, began to flood into the Chinese market, now that China has become a member of the World Trade Organization.

"This would add extra pressure on the market, which has already suffered from oversupply," Zhang said.

This situation will not change much in short term, because the country has yet to create new products and new areas for consumption and investment, Niu said.

Currently, policy factors still play an important role in expanding domestic demand, he said.

Fixed assets investments greatly depend upon government injections and in particular, treasury bonds.

Consumers could theoretically help pick up demand by continuing to spend, but consumption has become an uncertain contributor in the months ahead.

The central government can not expect Chinese consumers to spend further as they have more important worries such as pension, medical care and their children's education, according to Niu.

The vast rural population, which has more consumption desire, did not have enough money due to slow income growth over the past years.

China should further relax its "sound monetary policy" to solve the problem of the falling CPI, the economist added.

The government should also speed up reform in the banking sector so that the banking mechanism can respond quickly to the policy and market demand.

"The medium and small companies are thirsty for loans," he said.

When necessary, the central government should announce further interest rate cuts to spur domestic demand, he said.