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Strategies & Market Trends : Countries

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From: Sam Citron3/10/2009 8:26:30 AM
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China prices fall for first time in six years [FT]
By Jamil Anderlini in Beijing
Published: March 10 2009 04:05 | Last updated: March 10 2009 06:17

Chinese consumer prices in February fell for the first time in more than six years with the benchmark consumer price index falling 1.6 per cent from a year earlier, down from a 1 per cent rise in January.

The drop marked the tenth consecutive month of moderating price rises and compares with an 11-year record rise in the CPI of 8.7 per cent last February, when food and energy prices were soaring.

Beijing has targeted headline inflation of 4 per cent this year but many analysts say the government will struggle to meet that target and will have to act quickly if it is to avoid a period of prolonged deflation.

“The government must find new growth drivers to replace exports and housing or face the risk of a ‘W-shaped’ recovery and a more durable deflation problem,” said Ben Simpfendorfer, an economist with RBS in Hong Kong.

The fall in consumer prices was matched by a 4.5 per cent decline in the producer price index, its third consecutive month in deflationary territory and a faster decline than the 3.3 per cent fall in January.

China’s National Bureau of Statistics took the unusual step on Tuesday of issuing a statement explaining that it is too early to say deflation has taken hold in China and the drops in CPI and PPI were largely down to falling raw material prices and holiday-related distortions.

“Recent downward pressure on prices in China are very obvious but there is a big difference between our current situation and typical deflation,” Yi Gang, vice-governor of the central bank, said in state media reports.

China is likely to lower the amount of money it requires banks to hold on deposit with the central bank and can also reduce benchmark interest rates, analysts said. China’s benchmark one-year lending rate is currently set at 5.31 per cent and the required reserve ratio for banks is 13.5-14.5 per cent.

The government also plans to raise its minimum purchase prices for grains and accelerate pricing reform for power and refined oil products, which could provide a counterweight to deflationary pressures.

Falling food prices were a large contributor to the dip in CPI last month, with a drop of 1.9 per cent.

Chinese urban property prices fell by 1.2 per cent in February from a year earlier, the government said on Tuesday, the steepest decline since official records began in 2005.
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