The consumer price index (CPI), Chinese policy-makers' key inflation gauge, fell 1 percent in January compared with the same month in 2001, the sharpest decline in the last two years, the National Bureau of Statistics said yesterday.

The latest CPI decline follows a drop of 0.3 percent in December and November, and a decline of 0.1 percent in September.

"The latest decline was mainly because of Spring Festival, which falls on February 12 this year and not in January as it usually does," said Zhang Yingxiang, a senior statistician with the National Bureau of Statistics.

She said Chinese residents usually spend a lot during Spring Festival, driving up the price of consumer goods.

The decline also suggests that the global slowdown is having an impact on China, said Zhang Liqun, a senior researcher with the Development Research Center under the State Council.

"The global slowdown has not only resulted in fewer exports for China - a key engine for the Chinese economy - but also pushed down the country's consumer prices through imports," Zhang said.

He said foreign products, including low-priced oil and raw materials, have begun to flood the Chinese market now that China is a member of the World Trade Organization.

"This will add extra pressure to the market, which has already suffered an oversupply," Zhang said.

Zhang Xueying, a senior economist with the State Information Center, said more than 80 percent of the products made in China are oversupplied.

"This situation won't change much in the short term because the country has yet to create new products and new areas for consumption and investment," Zhang said.

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

Fixed-assets investment greatly depends upon government injections and treasury bonds, he said.

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

In a move to stimulate domestic spending, the central People's Bank of China on Wednesday announced an interest rate cut - the eighth since 1996 - that slashes the real interest on one-year deposits to 1.6 percent.

But Yuan Gangming of the Chinese Academy of Social Sciences said the impact of the interest rate cut would be limited.

Experiences from the last five years suggest that it was other government measures such as increasing salaries, providing compensation for laid-off workers, increasing pensions for retirees and announcing the week-long National Day and May Day holidays, not interest rate cuts, that helped boost domestic consumption.

Today, the government can not expect Chinese consumers to spend a lot since they have big financial worries such as pension, medical care and children's education, he said.

The vast rural population does not have enough money because of slow income growth in recent years.

(China Daily February 23, 2002)