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Will deflation return to China? China's consumer price index (CPI), the leading inflation index, recorded a 1.8-percent increase in April and May, reflecting a continual downward trend, according to a monthly report released by the National Bureau of Statistics. During the same period of last year, however, China witnessed a monthly CPI growth of more than 5 percent, making the government take measures to cool down the overheated economy and prevent further inflation. Will China face another circle of deflation? Does the government need to adjust its economic policy to deal with the newsituation? It is still too early to give a definitive answer. "The probability of deflation is low," Zhu Baoliang, chief economist of the economic forecast department under the State Information Center, told China Business Times, a Beijing-based newspaper. He cited three reasons to support his conclusion. Firstly, the central government expects no violent fluctuation in macro-economic development. Secondly, the price of public utility and service will grow rapidly, which will keep CPI at a high level. Thirdly, the price of some imported products such as oil is not likely to drop by a big margin. "China's economy is in a transitional period, but it is hard tosay that the economy has entered a period of deflation," China Business Times quoted Zhao Xijun, a professor of People's University of China, as saying. Since 1998, China has shadowed by deflation, which referred to shrinking domestic demand and a price decline. The proactive fiscal policy, adopted by the central government to rein in deflation, has led to fast economic growth for seven consecutive years. Last year, however, when the prices of grain, raw materials, fuels as well as real estate soared, the government felt it necessary to take macro-control measures to cool down the overheated economy and avoid further inflation. Referring to the question of whether deflation will return to China this year, Zhao said it's rather difficult to predict the future trend of the economy, because huge uncertainties still exist in terms of consumption, investment and export, the main driving forces of the economic growth. "China's overheated economy has softlanded successfully and it's time for China to readjust its strict macro-control policy to avoid possible deflation," Zhao Xiao, a researcher with the State-Owned Assets Supervision and Administration Commission (SASAC), said recently. The total demand is weak, said Professor Song Guoqing with the Beijing University, who predicted that the CPI may drop below 1 percent in the third quarter. There is no inflation pressure in the near future, so the main task is to stimulate the sluggish domestic demand and prevent deflation, said Song, who attributes the CPI slow-down to the decrease of real estate investment. The central government's policy to control the overheated real estate industry was a major factor for the price drop in May, because real estate is of great importance to the whole economy, Zhu said. Last month seven government departments issued a joint circularin an attempt to stabilize rocketing housing prices, levying additional business taxes on residential houses sold after being inhabited for less than two years and limiting developers' profitsto three percent. After the new policy was promulgated, Shanghai and Hangzhou, which experienced the most dramatic price hikes, have saw prices down by more than 5 percent immediately.
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