Beijing warned to guard against inflation rebound

PUBLISHED : Wednesday, 26 November, 2008, 12:00am
UPDATED : Wednesday, 26 November, 2008, 12:00am

The mainland's inflation might ease to 3 per cent next year but the authorities should still be mindful of a rebound, a top researcher with the central bank said yesterday.

Zhang Jianhua, head of the People's Bank of China research bureau, said there was no immediate deflation risk, while 'volatile oil prices' and 'changes in the value of the US dollar' could trigger a comeback of inflation.

Mr Zhang estimated the consumer price index, a key inflation measure, to rise less than 6 per cent. The index rose 6.7 per cent for the first 10 months after peaking at 8.7 per cent in February.

Inflation has been slowing since March amid a deepening global financial crisis and rising food supply. The index rose 4 per cent in October, the weakest in 17 months.

Some economists now consider deflation a bigger challenge than inflation, which could erode corporate profits and result in rising bad loans.

'China faces increased deflation risks due to overcapacity and unemployment pressure amid accelerated economic downturn and collapse of the global commodity price bubble,' said Ha Jiming, chief economist with China International Capital Corp.

Mr Ha expects next year's producer price index to decline between 6.3 and 7.5 per cent and consumer prices excluding food to drop 0.4 per cent.

Including food and Beijing's value-added tax cut for companies, the headline consumer price index was likely to rise 1 per cent next year, Mr Ha said.

Credit Suisse warned 'a sharply increased risk of deflation', predicting consumer prices to slow to 0.4 per cent in 2009 from the estimated 6.1 per cent this year.

JP Morgan expects inflation to ease to 2.5 per cent next year, giving Beijing room to cut interest rates.

JP Morgan Chase Bank economist Wang Qian said: 'Even the significant 4 trillion yuan (HK$4.54 trillion) fiscal stimulus by the Chinese authorities is unlikely to cause a significant rebound in global commodity prices.'

In a bid to prevent a sharp economic slowdown, the central bank has cut interest rates three times since September.

However, it kept rates unchanged last week despite wide expectations of another reduction.

One of the reasons behind the central bank's decision to hold rates steady was that a reduction might reignite the inflationary pressure since other major countries had also announced stimulus packages to stoke economic growth, a commentary in the China Securities Journal said yesterday.

Tables turned

Some now consider deflation a bigger challenge than inflation

In October, inflation was the weakest in 17 months at: 4%