Center

Specter of deflation warned

(Shenzhen Daily)
Updated: 2006-04-13 15:36

China faces the specter of deflation within the next two years, a government economist warned, if overcapacity continues to swamp domestic demand.

Raw materials and power prices are rising but downstream demand is insufficient to satisfy the excess supply from the industrial sector, said Zhang Hanya of the Academy of Macroeconomic Research at the National Development and Reform Commission (NDRC), the nation's top economic planning body.

"If the contradiction between the rising prices of raw materials caused by upstream monopolies and the inability to raise downstream prices due to competition is not resolved, CPI will continue to fall," Zhang said in a report published in the China Securities Journal yesterday.

"Drops like this will lead to deflation within one or two years."

The NDRC has repeatedly warned over the last year of overcapacity in about a dozen sectors, including property, cement, steel, autos, and metal smelters.

Rapid expansions have raised the prices of commodities world-wide, while increasing the toll of pollution in China, and the struggle to sell the resulting output has caused trade disputes, erased profit margins and carries the risk of defaulted loans, bankruptcies and unemployment.

On Tuesday, the academy's deputy head said consumer prices in China were unlikely to rise by more than 2 percent in 2006, but predicted that China would avoid both high inflation and deflation.

Annual consumer inflation in China was 0.9 percent in February and 1.9 percent in January.