Analysts discount fears over deflationary trends in China

China slipped deeper into deflation in April, but economists dismissed the possibility of central bank shifting policy as a result. They continued to express confidence that prices would start rising again before the year ended.

In the third consecutive month of deflation consumer prices fell 1.5 per cent after a 1.2 per cent fall in the 12 months to March according to the National Bureau of Statistics.

Factory gate prices declined 6.6 per cent in the year to April, the rate of decline accelerating from a 6.0 per cent fall in the 12 months to March.

Both falls were one-tenth of a percentage point deeper than markets had expected, but according to economists the declines marked a correction to spikes in the cost of food and other commodities a year ago.

According to analysts inflation is likely to remain negative over the next few months until the base effect of high prices last year faded away. They say that inflationary pressures would resume in response to accommodative monetary policy, strong fiscal stimulus and aggressive bank lending later in the year.

The Chinese government embarked on an aggressive interest cut drive in the final months of 2008 to complement a 4 trillion yuan stimulus package for shoring up a flagging economy.

However, with several indicators pointing to a recovery, not many economists expect further reductions in borrowing costs as bank lending has boomed in the first four months of the year.

The government has pumped billions of dollars into construction projects to spur demand and stimulate growth. Recent improvements across several sectors such as manufacturing, auto sales and real estate transactions are seen as evidence of the success of the strategy, despite the fact that exports to overseas markets remain weak.

Analysts say that deflationary concerns appear to be receding with the economy showing signs of recovery.

They expect consumer prices to perk up in the latter half of the year, with expectations of rising prices in the future boosting consumer spending.

They also expect the government move to liberalise control on utility rates and fuel prices that have been kept at lower than global rates to push prices.

They add that though it might be somewhat early to say they are worried that prices would rebound by mid-year leading to inflation rather than deflation.