02/18/2003
China Daily: Qi Jingmei

Although deflationary pressure in China will ease slightly in 2003, the overall consumer price index is likely to remain flat. But major factors such as drastic fluctuation in the domestic oil price following a possible Iraq war could change this scenario.

This year, household consumption prices will increase marginally by 0.5 per cent. Retail prices for consumer goods will fluctuate between -0.2 and +0.3 per cent. And while prices for production and industrial goods may stop falling, they will not achieve more than 3 per cent growth. The price of agricultural produce will still decline but at a reduced rate of about -1 per cent.

Thanks to some beneficial factors, consumer prices will increase by a small margin this year.

The imbalance between low consumer prices and rapid economic growth has hindered the country's economic progress. According to estimates from recent central government meetings, the country's consumer price index (CPI) in 2003 is expected to increase by 1 percentage point. This goal is crucial for governments at all levels charged with promoting economic growth.

Although the government has deregulated prices for more than 90 per cent of products, it still controls the price of some important staple goods. In 2003, governments at all levels are considering taking regulatory measures to push consumer prices up.

Accelerated growth in industrial production will also help boost consumer prices.

Against the backdrop of a rapidly developing national economy, heavy industry will maintain strong growth with the help of major State investment this year.

Improved economic returns from industry will spur on production. From January to November 2002, industrial enterprises made an aggregate profit of 195.6 billion yuan (US$23.6 billion), 19.5 per cent higher than over the same period in 2001.

And robust exports will continue to encourage industrial production and thus expand demand for energy and raw materials, raising prices for products and finally household consumption prices.

Another factor pulling consumer prices upwards is the growth in money supply and loans from financial institutions.

The slump in consumer prices in 2002 was closely related to insufficient money supply for enterprises and other market players.

But during the latter half of 2002, money supply expanded to improve liquidity in society. Financial institutions issued many more loans. In the first 10 months of 2002, loans hit 1.4 trillion yuan (US$172 billion), 500 billion yuan (US$60 billion) more than the same period in 2001. The boost in money supply facilitated business development and helped lay a foundation for possible price hikes.

In 2003, the country's preferential financial policy will give extra support to economic development to expedite rises in consumer prices. Retail prices for consumer goods are expected to increase by a larger margin than in 2002.

Last year's annual sales of retail goods jumped up by nearly 9 per cent. Growth in retail goods will be bolstered by following favourable factors.

The low consumption level in 2002 means there is room for a rapid increase in 2003. And people's growing hunger for new products will play a key role in boosting household consumption this year. Substantial increases in income in 2002 and expected further growth in 2003 will cement consumer confidence and promote a jump in consumption.

However, it should also be noted that China will have to endure low consumer prices for a while.

On the one hand, the country's consumer prices will not rise with rapid economic development because of many deep-seated contradictions in the national economy. On the other hand, China's scientific and technological progress, and its integration with the global economy, have made low consumer prices an inevitability during the transition period.

First, energy and raw materials supplies are no longer bottlenecks that limit industrial production. Supplies are now adequate and exert downward pressure on prices of industrial products.

In the 1980s and early 1990s, shortages in energy and raw materials pushed up the overall price of industrial products.

But, by the late 1990s, coal mining and oil drilling technology substantially improved and electricity and steel production caught up with the growth in demand. Developments in such industries have outpaced the national economy. Meanwhile, due to the expansion of the country's foreign exchange reserve, more and more supplies of energy and raw materials could be imported. So, in recent years, prices of products have dropped, consequently curbing rises in consumer price.

Second, product and technological improvements have led to a slump in prices of high-tech and consumer goods.

In the late 1990s, growth in household consumption slowed. To maintain and expand their market share, most enterprises tried to upgrade their products. Some reduced their costs by introducing advanced technology. But others resorted to vicious price wars.

Meanwhile, independent research and development helped domestic enterprises replace their expensive imported production chains with their own equipment to drastically slash the costs and prices of many durable consumer goods.

Third, high inflation from the end of the 1980s to the beginning of the 1990s pushed China's consumer prices much higher than the global average level. The recent decrease in domestic consumer prices marks their return to a reasonable level in global terms.

Finally, although the service sector is capable of pulling consumer prices up, it cannot set prices too high. The service sector is still developing slowly and consumer demand has been affected by the increase in the number of laid-off workers in the country.