The second straight month of decline in the consumer price index (CPI) in December gave a dangerous signal that China may once again be trapped by deflation.

The National Bureau of Statistics said on Wednesday that China's CPI fell 0.3 per cent in December 2001 compared with the same month the year before.

The latest decrease follows a drop of 0.3 per cent in November and a decline of 0.1 per cent in September, the bureau said.

"This is a dangerous warning," said Niu Li, a senior economist with the State Information Centre. "If the situation continues, China will suffer a deflation."

The central government should try to relax the present monetary policy to encourage individual consumption and private investment, Niu said.

The monetary policy will help in adjusting the country's consumer prices, he said.

According to the statistics bureau, average food prices edged down 0.8 per cent in December compared with the same month a year ago, with prices of fresh vegetables falling 5 per cent.

"A drop in food price was one reason for the decline in December's consumer prices," said Zhang Liqun, a researcher of the Development Research Centre under the State Council.

The situation also suggests that the global economic slowdown is having an impact on China.

The slowing of the world economy not only meant shrunk exports for China, but also pressed down the country's consumer prices through imports, Zhang said.

Niu Li agreed with Zhang, adding the insufficient effective domestic demand also contributed to the CPI drop.

Policy factors still play an important role in expanding demand, Niu added.

Fixed assets investment depends greatly on government injections of particularly treasury bonds, he said.

Consumers could theoretically increase demand by continuing to spend, but consumption has become uncertain in the months ahead, the economist said.

To stimulate domestic spending, the central People's Bank of China has announced seven successive interest rate cuts over the past four years and began to impose income taxes on bank deposits in 1999, thereby slashing real interest on one-year deposits to about 1.8 per cent.

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.

But the central government cannot expect Chinese consumers to spend much more since many have to worry about pension, medical care and their children's education, he said.

And while the vast rural population may have more consumption desire many did not have the money to spend.

(China Daily January 18, 2002)