Ｅｘｐｅｒｔｓ Ｓａｙ：Ｄｏｎ’ｔ Ｗｏｒｒｙ ａｂｏｕｔ Ｎｅｇａｔｉｖｅ Ｇｒｏｗｔｈ

In todays world, data is one of the most important things. Data can show everything. CPI and PPI are two indexes that people are familiar with. In China, both indexes saw decrease in February.

On March 10, 2009, the main price indexes of February were disclosed. The data issued by the National Bureau of Statistics (NBS) shows that the Consumer Price Index (CPI) and the Production Price Index (PPI) of China decrease respectively by 1.6% and 4.5% in February. This is the first time of negative growth of CPI in China in six years.

In comparison, last year those two indexes saw monthly increase of 8.7% and 10.1%.

Everything Happens for A Reason

The source from the NBS attributed the negative growth of CPI and PPI in February to the drastic decrease of the primary products price in the international market and some special factors.

Zhao Qingming, a senior researcher of the Research Department of the China Construction Bank, said that the decrease of the price was the adjustment towards the normal interval after the crazy increase of all the resources last year.

February is the tenth straight month in which the growth rate of CPI fell. Last year the growth rate of CPI in China saw both its peak and valley. In February 2008, the CPI in China saw a year-on-year growth rate of 8.7%. Then it continued to fall. In January 2009, the growth rate was only 1%.

The data shows that the food price and non-food price respectively fell by 1.9% and 1.2% in February. Of which the pork price fell by 18.9% and the price of fresh vegetable fell by 9.3%.

Zhuang Jian, senior economist of the China Representative Office of Asia Development Bank, told the journalist from Xinhua News Agency that the negative growth of CPI and PPI is consistent with the market expectations. Last February the growth rate of CPI in China reached its peak. The high benchmark and the sufficient supply of the commodities demanded by consumers result in the decrease of CPI in this February.

In China, the consumption products price, especially the food price, will see obvious increase in the month in which the Chinese Spring Festival comes. The Chinese Spring Festival of 2008 came in February and the snow disaster all result in the high growth rate of CPI at that time.

The negative growth has happened to PPI in three straight months. The growth rates of PPI in December 2008 and January 2009 were respectively -1.1% and -3.3%.

The source from the NBS said that the prices of the basic products like crude oil, ores metal and so on, influenced by the continuous decrease in the global economic growth rate, went back into a low state after the temporary rebound at the beginning of the year. This resulted in the apparent fall of the imports price of the bulk products and drastic decrease of the price of main production resources.

In February, the energy price in the international market saw a year-on-year decrease of 48.8%, 3.4 percent higher than the decrease rate in January. The non-energy price fell by 33.1%, 9.4 percent higher than a month ago. The price of the metal and the mine products fell by 48% with an increase of 10.3 percentage points. Hereinto, the prices of the aluminum and copper fell respectively by 41.8% and 55.3%.

In Zhao Qingmings opinion, the fall of PPI and CPI in China can also be attributed to the decline of Chinas economic growth rate and depressed demand of consumption and investment.

Its Not Certain to Have Deflation in China

If the price fell to a certain extent, there may have deflation happen. However, the source from the NBS said that it was not sure that there has been deflation in China even though CPI and PPI both saw negative growth.

Yi Gang, Deputy Director of the Peoples Bank of China (PBC), said that the situation of China was quite different from the typical deflation, which embodies the characteristics of continuous fall of price, credit and money supply, as well as the economic recession, or namely the negative growth in GDP. Now in China, negative increase may happen to the price in the future, but both the credit and money supply see a fast growth trend and the economic growth rate can be kept above 8% in this year.

Su Ning, another Deputy Director of the PBC, said that it is quite unlikely to have deflation in China because the market fluidity in China is sufficient and the loan amount is increasing rapidly.

According to the official data, the growth rate of Chinas broad money (M2) has kept picking up for two straight months. In last December and this February, it respectively increased by 17.8% and 18.8% year on year, which was the highest since June 2006. In addition, there was a large increase in the loan amount newly issued by the financial institutions. In January, the amount of newly-issued loans was 1.6 trillion yuan (USD 233.9 billion), which was the largest in the history. In February, the newly-issued loan amount still passed 1 trillion yuan (USD 146.2 billion).

According to Yi Gang, to judge whether there is deflation mainly depends on the chain index of price, namely, the month-on-month change. If the negative month-on-month increase happens to the price for six straight months, it can be said that the deflation happens.

According to the data, seeing from the chain price index, we can acquire that the general level of the resident consumption price in February was the same with the one in January. In a whole, the decreasing rate of PPI takes a decline trend. The PPI in February fell by 0.7% over a month ago while in January the month-on-month growth rate was 1.4%.

According to Yi Gang, the PBC laid emphasis on preventing deflation in order to prevent the price falling again which may cause the out-scaled negative growth rate. “We must have enough monetary policies to deal with the deflation.”

Continuous Back-fall Brings Opportunities and Challenges

In the experts opinion, if the price falls to a certain extent, some enterprises will see decrease in their profits and they will have difficulties in production and operation. This undoubtedly will bring negative influence upon the motivations of producers as well as impetus to the economic development.

“The continuous fall of price will impact the economic viability. This problem cant be neglected,” said Ai Hongde, Headmaster of Dongbei University of Finance and Economics. “The fall of prices shows the surplus production capacity and the insufficient confidence of the resident. With less strong consumption ability, people dont want to use their deposits. Therefore the government needs to give more stimulation to consumption.”

According to Zhao Qingming, presently the government needs to enlarge the consumption and investment, trying to keep the stable and fast economic growth rate, to enhance the social confidence. The enhanced confidence can promote the consumption and investment, ensuring the stable trend of the prices.

It was suggested in the governments work report (2008) that the increase amount of the general resident consumption price level shall be maintained around 4%. It was also said that realizing this goal could help to guide the reasonable market expectations sand keep the market confidence.

In Zhuang Jians opinion, the negative growth of CPI and PPI has the two-sided sword effect: the stress of deflation challenges the economic growth, while the back-fall of the prices provides new opportunities for China to conduct the price reform.

“The goal of price reform is to solve the problems of low resource price, failure in reflecting the scarcity degree of the resources, and incapability of making up the environmental protection cost in China. Those problems arose during the process of price mechanism,” said Wang Xi, Professor from the Law School, Shanghai Jiaotong University. “The drastic decrease of the resource products in the international market releases the supply and demand contradiction of the domestic resource products. The fall of the price is the best opportunity to promote the reform to the resource products price.”

In the National Peoples Congress and Peoples Political Consultative Conference, Chinese premier Wen Jiabao gave out the governments work report, saying that the government is trying to promote the reforms to the resource prices, electric power price and water price, to straighten out the relationship between the coal price and the electric power price and to consummate the management system of collecting water resource fees.

“Those measures, once carried out, will be helpful for the prices in China to rebound stably,” said Zhuang Jian.