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Money Supply May Prop Falling Prices
China will relax its "sound monetary policy" but not resort to an overall tax cut to solve the present economic problem of falling prices, a senior official with the National Bureau of Statistics said.

"An overall tax cut was impossible," said Li Xiaochao of the bureau's comprehensive statistics department. "But there is room in the monetary policy to solve the falling price problem."

The People's Bank of China, the country's central bank, has already announced plans to increase the money supply, Li said.

"This will play an active role in solving the problem of falling prices," he said.

Zhang Liqun, a senior researcher with the Development Research Center at the State Council, said the government should also speed up reform in the banking sector so banks can respond quickly to the policy and market demand.

"The banks and small companies are thirsty for loans," Zhang said.

When necessary, the central government can announce further interest rate cuts to spur domestic demand, said Niu Li, a senior economist with the State Information Center.

"Relaxing the monetary policy should be one of the best ways to solve the falling price problem," Niu said.

China's consumer prices have suffered six months of decline since November last year, and there is no sign that consumer prices will pick up in the coming months, Niu said.

The continuous falling prices will do harm to the country's economic development, if no measures are taken, Li Xiaochao added.

"The price decline will undermine the expectations for the future for companies and residents," he said.

Imbalanced supply and demand is the major cause for the decline of consumer prices, said Zhang Xueying, a senior economist with the State Information Center.

"More than 80 per cent of the China-made products are oversupplied," Zhang said.

On the other hand, foreign products including low-priced oil and raw materials began to flood the Chinese market, now that China has become a member of the World Trade Organization.

"This adds extra pressure on the market, which has already suffered from oversupply," Zhang said.

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

Fixed assets investment greatly depend upon government injections and in particular, treasury bonds, he said.

Consumers could theoretically help pick up demand by continuing to spend, but consumption has become uncertain in the months ahead, the economist said.

With a move to stimulate domestic spending, the central People's Bank of China has cut the interest rate eight times since 1996, slashing real interest on one-year deposits to about 1.6 per cent when deducting income tax on bank deposits.

But Yuan Gangming of the Chinese Academy of Social Sciences said the impact of the interest rate cut would be very limited, although the move is a wise choice now.

Experience from the past five years suggests that it was other government measures such as increasing salaries, providing compensation for laid-off workers, increasing pensions for retirees and announcing weeklong National Day and May Day holidays that helped boost domestic consumption.

At present, the central government cannot expect Chinese consumers to spend further as they have much more to worry about such as pensions, medical care and their children's education, he said.

The vast rural population, which has more consumption desire, does not have enough money due to slow income growth in the past few years.

(China Daily June 11, 2002)

Consumer Price Index on the Decline
Central Bank Moves to Ease Deflation Pressure
Deflation Threat Still There
Consumer Price Index 0.3 Percent Down in December
The People's Bank of China
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