China’s central bank on alert for deflation
PBOC chief Zhou Xiaochuan warns of need for vigilance as some prices take a hit from weaker demand in the domestic economy
China needed to be on alert for deflation, central bank governor Zhou Xiaochuan warned yesterday, amid signs of slowing price rises.
Zhou said the central bank was also on the watch for deflation around the world, falling commodity prices and a slowing of the domestic economy.
"China's inflation is declining. We need to be vigilant to see if this [disinflation] trend continues, and if it will lead to deflation," Zhou, who heads the People's Bank of China, said at the Boao Forum for Asia in the southern province of Hainan.
The warning came as a PBOC adviser reportedly said China faced "tremendous" downward pressure in the first quarter to sustain 7 per cent growth - the 2015 target Premier Li Keqiang set for the country in his annual report earlier this month.
China's disinflation eased last month due to a seasonal pick-up in food prices during the Lunar New Year, with the consumer price index rising 1.4 per cent year on year after hitting a five-year low of 0.8 per cent in January, according to the National Bureau of Statistics.
But the producer price index fell by 4.8 per cent in February from a year earlier, as weak domestic demand led to a build-up in deflationary pressure at the factory gate.
Guan Qingyou, chief macroeconomic researcher with Minsheng Securities in Beijing, said there was no doubt that further policy easing was on the way. "The central bank seems to realise that it's better to act sooner than later, considering China's deepening slowdown and deflationary pressure."
Zhou said the central bank still had room to use monetary levers if inflation continued to fall. "Quantitative easing is not the only tool, we also have price-based tools," he said. One price-based measure is to adjust interest rates.
Zhou also said the PBOC would maintain a prudent monetary policy even though it had stepped up easing to counter slower growth.
But central bank adviser Chen Yulu said "prudent" probably did not describe monetary policy in its conventional sense.
"In the monetary policy committee, the discussion is always about looking for new structural tools to use, including targeted easing," Caixin quoted Chen as saying yesterday.
He agreed the country should be on alert for deflation.
Zhou added that traditional industries had used up the bulk of bank loans and capital market funds, and should gradually cut their share of these resources to make room for new industries such as internet services and the hi-tech sector.
