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Source: www.asiaecon.org |

THE ARGUMENT OVER FALLING PRICES IN CHINA


New statistical information was released earlier today that listed a year-to-year decline in the Consumer Price Index (CPI) and Producer Price Index (PPI) in China. The CPI fell to 1.6 percent, marking the first time since December 2002 that the year-on-year CPI has fallen, while the PPI dropped for the third consecutive month to 4.5 percent.


New statistical information was released earlier today that listed a year-to-year decline in the Consumer Price Index (CPI) and Producer Price Index (PPI) in China. The CPI fell to 1.6 percent, marking the first time since December 2002 that the year-on-year CPI has fallen, while the PPI dropped for the third consecutive month to 4.5 percent.

Although some economists are attributing the falling prices to receding consumer demand, many government officials are refuting the accusations that the two figures represent falling domestic demand for Chinese goods. Su Ning, Vice Governor of the People’s Bank of China (PBC), commented on the recent skepticism,  “Declines in the CPI and PPI are attributed more to falling global commodity prices, rather than weakening domestic demand”. The New York Times has also attributed the significant drop in the CPI to other variables, such as last year’s artificially high prices for food. Food prices and other commodities were selling for higher than normal because severe weather conditions had created a shortage in supply for those goods.

Declines in consumer prices are having implications for investments such as real estate and gold because of the speculation of deflation. Periods of deflation are characterized by prolonged periods of falling prices. Analysts at Moody’s Economy.com, such as Sherman Chan, have suggested that many investors in China will wait for prices to bottom-out before they start to invest their money.  “In most parts of China, households will likely choose to hold on to their savings for the rest of the year rather than committing themselves to property purchases,” Chan explained.

Gold has been a customary investment for people looking to hedge against falling prices, but that has not been the case more recently due to the need for liquidity. Gold owners are being forced to sell their assets to repay their debts, making deflation count against gold.  

The Chinese government is not seeing deflation as a major concern, although they are continuing to monitor price levels and developing strategies that will help stabilize consumer prices. Because the government is crediting the falling prices in domestic markets to receding global demand for goods, the PBC is holding off from taking any monetary actions to see if markets adjust to fiscal policies.

One of the fiscal strategies that is being implemented is increasing the price at which they buy rice and wheat from domestic farmers. Food prices account for one-third of the CPI in China and officials hope that subsidizing farmers will prevent them from having to drop the price of their goods. Considering that food accounts for such a large portion of the CPI, stabilizing food prices should help sustain overall current price levels.

Although Chinese government officials are refuting the presence of deflation in China, economists at Goldman Sachs are claiming that China has been experiencing deflation for some time. These assertions are based on the fact that the month-on-month CPI reading have been negative for seven straight months. Despite the disagreements between Chinese government officials and private analysts, both expect the CPI to rebound later on this year, with Beijing targeting the CPI to grow 4% by year’s end.



Source: Asiaecon.org
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Source: www.asiaecon.org |


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