The Chinese economy will not suffer inflationary pressure despite a 1.1 percent rise in the consumer price index (CPI) during the first half of this year, officials and experts have claimed.
Indeed, there could even be deflation.
"For the whole of 2001, the CPI will rise no more than 2 per cent," Qiu Xiaohua, deputy director of the National Bureau of Statistics, predicted. "The rate should be relatively moderate."
This does not mean, however, that China's economy is safe. Though there has been some easing, deflationary pressure is still a concern, according to Qiu.
"Overall, demand and supply are still unbalanced," he said.
Qiu's prognosis is not unique among experts. Zhang Xueying, an economist with the State Information Centre, noted that supply is greater than demand for more than 90 percent of the country's industrial products.
This situation could eventually lead to falling prices and falling profits for China's producers, which would threaten overall economic growth in the long run.
On the other hand, China's exports growth, an important engine for gross domestic product (GDP) growth last year, decreased because of a slowdown in the global economy, Zhang said.
This drop only increases the likelihood of deflation. Export growth through June dropped to 8.8 percent from 28 percent a year ago.
The rate dropped further to 6.6 percent in July.
Given this situation, the government has pinned hopes on stimulating domestic demand -- fixed assets investment and consumption -- to boost the economy.
The central People's Bank of China has announced seven successive interest rate cuts over the past four years and began to impose income tax on bank deposits in 1999, having slashed real interest on one-year deposits to about 1.8 percent.
The central government also took other measures such as increasing salaries, providing compensation for laid-off workers, increasing pensions for retirees and announcing week-long National Day and May Day holidays to boost consumption.
"The central government could not expect Chinese urban consumers to spend more as people are now struggling with worries like pensions, medical care and children's education," Zhang observed.
The country has yet to establish a nation-wide social security system.
The vast rural population, which has demonstrated a greater desire to consume, has been unable to buy goods because of slow income growth.
Statistics indicate that per capita cash income for Chinese farmers reached 1,063 yuan (US$128) during the first half of this year, an increase of only 4.2 percent from the same period last year.
The slow growth of farmers' income will greatly affect the implementation of the government's demand-stimulation policy, as 800 million farmers form a huge rural market vital to domestic demand.
"If consumption in rural areas cannot be stimulated, the full expansion of domestic demand will not be realized," Zhang explained.
As for promoting the growth of fixed assets investment, the State has been forced to spend large amounts of its own money.
Fixed assets investment in the first half of this year totalled 1.2 trillion yuan (US$145 billion), a 15.1 percent increase from the same period of 2000, while the corresponding growth rate of non-government investment actually dropped by 2.1 percentage points from a year ago to 6.5 percent.
Private investors are still excluded from many competitive industries such as automobile manufacturing, civil aviation and power generation and transmission.
Although both are optimistic that the government's policy will succeed, Qiu and Zhang claim a lack of private investment combined with poor domestic demand and chronic oversupply could cause significant deflation in the future.
(China Daily 08/13/2001)
