China's lower consumer prices in the past two months have aroused debates among officials and economists as to whether the country is about to enter another deflation period.

Some economists argued the consumer price index (CPI), policy-makers' key inflation measurement, could even drop below zero, while others claimed the CPI would continue to grow at a moderate rate of 2 to 3 per cent.

Earlier figures from the National Bureau of Statistics indicate that China's CPI rose 1.8 per cent in both May and April, the slowest rise since September 2003.

Yuan Gangming, a senior economist with the Chinese Academy of Social Sciences, said this was a clear indication that the country's consumer prices had begun to head towards deflation.

"Looking ahead, there are almost no factors except the higher oil prices, which can push the CPI up," he said.

The fall in grain prices and the slower price rises of the means of production will continue to drag down the country's consumer prices, he said.

The possibility of a further oil price rise also becomes small, since the prices have already been at a higher level, he said.

"The CPI is likely to drop to zero or less in a single month for the rest of this year," he said.

The decline in the CPI suggests the country's economy, fuelled by a weak domestic demand, has gone down, he said.

Professor Song Guoqing at Peking University agreed China's current economy was in a period of weak overall demand.

There was a possibility that the country's CPI would drop to less than 1 per cent in the third quarter, he said. "This did not exclude the possibility of a further CPI drop to zero or lower."

Song expressed worries that tightening measures, which aimed at preventing inflation, could lead to deflation.

But Zhang Xueying, a senior economist with the State Information Centre, said China is unlikely to face deflation.

"There are pressures on price rises of a number of products including electricity, water and gas," he said.

The government may take the opportunity of a lower CPI to raise the prices of public utilities such as water and electricity, he said.

The high prices of energy and raw materials may also be passed to the end-products, as companies have a limit to bear price pressures, he said.

Fixed asset investment, fuelled by the increasing enthusiasm of private capital, may also go up if the government loosens measures, he said.

Zhu Zhixin, vice-minister of the National Development and Reform Commission, told an earlier seminar that the Chinese economy will continue to grow stably and rapidly.

The slow growth in CPI and fixed asset investment alone does not necessarily mean the economy has gone downward, he said.

Wang Zhao, a senior researcher with the State Council Development Research Centre, said China will not face deflation, nor inflation.

The decline in exports, loans and industrial companies' efficiency suggests the country's economy has become stable.

China's economic growth is expected to stabilize at about 9 per cent this year, he said.

The stable economic growth and the higher oil prices will keep consumer prices at a moderate level.

Zhuang Jian, a senior economist with the Asian Development Bank, agreed this year's consumer prices will rise moderately at 2 to 3 per cent.

"The country will not face deflation," he said.

The internal vitality of the Chinese economy is very strong, he said. 

(China Daily June 30, 2005)