Whether or not China's economy is losing speed has been the hot topic of discussion in China's economic circles the last few months. At the Second China Economic Observation Forum on Sunday, organized by the China Center for Economic Research (CCER) of Peking University, economists predicted that China's economy might slide into a deflated state characterized by persistent consumer price decreases.

Lin Yifu, the CCER director, noted that overproduction in most manufacturing sectors since 1998 and over-investment in some sectors in 2003 and 2004, is likely to deflate China's economy in the latter half of 2005.

Wang Jian, Deputy Secretary General for the Economic Research Institute with the National Development and Reform Commission, said that a slower growth of the Consumer Price Index (CPI), dropping enterprise profits, as well as losses in downstream industries are all signals that China's economy has cooled down.

According to Wang, China's economy has reached the middle phase of the high-growth cycle driven by heavy industry investment since 2003. Investments are expected to fall in 2006 despite a continuing growth, Wang said.

As for the consumer sector, because this year's good harvest might result in a slight decrease in prices of farm produce, Chinese farmers, accounting for China's largest population, are expected to see their net income growth for this year lowered, which will limit the expansion of domestic demand to a large extent, Wang added.

On the other hand, expectations of slowed economic growth this year for Japan, the European Union and the United States will also lead to a decrease in China's export expectations, Wang said.

As this cycle of investment draws to a close in 2007, new production capacities will be set and it would be inevitable to see an oversupply and price decreases then, Wang added.

According to Yuan Gangming, a research fellow with the China and World Economy Research Center at Tsinghua University, maintaining a rapid rate of growth will bring down investments and a drop in consumer and industrial goods prices. Yuan added that a drop in prices for raw materials can also be expected.

Professor Song Guoqing with the CCER has the same worries. Through data analysis, Song demonstrated that the 9.5 percent growth of China's gross domestic product (GDP) in the first half of this year was driven primarily by the growth of favorable trade balances. Real growth of domestic demand was only 3.5 percent.

Further, with cooling investment in the real estate industry, and pessimism on favorable trade balance growth caused by a decreased overseas market demand, trade frictions and RMB appreciation, China's economy should cool down in the short term, Song said.

But Song doesn't believe that the period of deflation will last very long.

Lin Yifu added that overproduction will not drive the economy down much in one or two years.

Lin suggested expanding domestic demand, especially the purchasing power of farmers, by supporting infrastructure construction in rural areas and giving more urban employment opportunities to farmers.

The CCER-hosted forum held quarterly usually attracts top-notch economists who gather to discuss China's economic situation.

(Xinhua News Agency August 1, 2005)