The latest decline follows a drop of 1.3 percent in April, 0.8 percent in March, 1 percent in January and 0.3 percent in December and November last year.

The consumer price index in the first five months of the year was down 0.8 percent compared with the same period a year ago, the statistics bureau said.

"There are no signs that the consumer price index (CPI), the key inflation gauge for Chinese policy makers, will pick up soon," said Li Xiaochao, deputy director of the bureau's comprehensive statistics department.

The falling prices will have negative effects on the country's sound economic development, he said.

"The government should further beef up the role of its monetary policy to deal with the falling price issue," he said.

The central bank may increase the monetary supply and increase loans for small- and medium-sized private companies, he added.

Urban consumer prices in May dropped 1.7 percent compared with a year ago, while rural prices fell 0.4 percent, according to the statistics bureau.

Prices for consumer goods in May dropped 1.9 percent from a year earlier, while prices for services rose 1.6 percent.

Prices for non-food goods dropped 0.9 percent, and food prices were down 1.5 percent.

"The imbalance between demand and supply continues to be a major reason for the CPI decline," said Niu Li, a senior economist with the State Information Centre.

"More than 80 percent of the China-made products are oversupplied. This situation can not change much in the short term, because the country has yet to create new products and new areas for consumption and investment," Niu said.

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

Fixed-asset investment greatly depends upon government injections and in particular, 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, he said. "The central government cannot expect Chinese consumers to spend further as they have worries such as pension, medical care and their children's education."

While the rural population may have more consumption desire, it lacks funds due to slow income growth in the past few years.

The CPI decline also suggests that the global slowdown is having an impact on China, Li said.

Foreign products, including low-priced oil and raw materials have begun to flood the Chinese market, now that China has become a member of the World Trade Organization. This adds extra pressure to the already oversupplied market, he said.

(China Daily HK Edition June 14, 2002)