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Deepening deflation
HOME > PAST ISSUE > MAGAZINE ARTICLEOctober 2002
Price declines in most sectors of the economy and in most regions of
the country indicate continued high levels of oversupply in the
economy.
Chinese consumer prices continued to fall in August, and a closer look at the government's CPI figures indicates that the problem of deflation may be even more worrisome than many analysts have acknowledged. Variations in the CPI trend across the country point to bottlenecks caused by heavy investment spending in certain areas, notably the western regions and Shanghai, but the general trend is still one of continued price declines in all but a handful of sectors.
Earlier this year, expectations rose that China's deflation problem might be coming to an end, as the CPI remained flat year-onyear in February after three consecutive months in negative territory. Official projections around this time were for full-year CPI inflation of 1-2 per cent in 2002. The February blip might be the result of the different timing of the Spring Festival holiday period over the past two years. Another possible reason was that it was a statistical anomaly, supported partly by higher prices for food and energy.
Whatever the reason, since then consumer prices have fallen in each successive month on a year-on-year basis, with seasonal fluctuations in food prices no longer offsetting industrial deflation in certain months. The August 2002 figures, in fact, show a slight decline of 0.4 per cent in food prices from August 2001 - a trend that may intensify next year as China's agricultural markets are further liberalised.
The real drivers of CPI movements in recent years have been continued rises in the price of regulated services (particularly healthcare, housing rental and public utilities) and countervailing declines in the price of manufactured goods. While these broad trends remained unchanged in August from most of the past year, more detailed figures from the National Bureau of Statistics show a number of significant shifts at the regional and sectoral level.
The Chinese economy is still far from fully integrated, and CPI trends have varied widely from province to province. At one extreme, seven of the country's 31 provinces (including minority autonomous regions and directly-administered cities) showed rising consumer prices in August, despite the national trend of deflation. The CPI index for Qinghai rose by a startling 3.4 per cent year-on-year, while prices rose by 0.7 per cent in Shanghai and 0.5 per cent in Tibet. Given the weak pricing power of Chinese producers generally, these anomalous figures seem to indicate localised areas of shortage, possibly in the labour and property markets, in regions targeted for high-priority state investment. Qinghai and Tibet are among the most sparsely populated regions of the country, and rising prices there are a likely consequence of heavy infrastructure spending connected with Beijing's 'Go West' programme. Likewise, Shanghai has continued to receive preferential allocations of credit from China's state-owned banks, particularly for infrastructure development in Pudong New Area.
At the other extreme, some provinces showed CPI deflation rates well above the nationwide average: prices fell by 1.9 per cent in Shanxi and by 1.2 per cent in Anhui, Guangxi, Sichuan, Chongqing, Shaanxi and Xinjiang. Some of these figures may represent severe distress in particular product markets ?for example, coal in Shanxi and cotton in Xinjiang (provinces that might otherwise have been expected to experience price pressures generated by 'Go West' projects).
Technological progress
The bureau's breakdown of CPI trends by product category is equally revealing. The sharpest price fall was a 16.4 per cent yearon- year decline in communications equipment, highlighting the impact of technological progress in this sector. In other areas, however, price declines point to a worsening of overcapacity, even in markets where Chinese goods are internationally competitive. Textile prices fell 2.6 per cent year-on-year, which seems to confirm earlier indications of haphazard capacity expansion in the sector, such as a sharp rise in imports of textile machinery. This is happening several years before Beijing's trading partners will open their markets to apparel imports under the terms of China's WTO entry.
There are also signs of distress in the home appliance market, particularly for producers of television sets. Prices of 'durable consumer goods for entertainment purposes and their repair services' fell by 9.2 per cent year-on-year, indicating continued oversupply. The television set industry is certainly benefiting from foreign investment, especially by Hitachi, which has partnered with a Chinese firm to produce for the Japanese market. However, the shift to digital transmission format for high-definition television promises to make China's entire manufacturing plant obsolete within a few years ?suggesting that this sector may face employment pressure towards the middle of this decade.
Chinese consumer prices continued to fall in August, and a closer look at the government's CPI figures indicates that the problem of deflation may be even more worrisome than many analysts have acknowledged. Variations in the CPI trend across the country point to bottlenecks caused by heavy investment spending in certain areas, notably the western regions and Shanghai, but the general trend is still one of continued price declines in all but a handful of sectors.
Earlier this year, expectations rose that China's deflation problem might be coming to an end, as the CPI remained flat year-onyear in February after three consecutive months in negative territory. Official projections around this time were for full-year CPI inflation of 1-2 per cent in 2002. The February blip might be the result of the different timing of the Spring Festival holiday period over the past two years. Another possible reason was that it was a statistical anomaly, supported partly by higher prices for food and energy.
Whatever the reason, since then consumer prices have fallen in each successive month on a year-on-year basis, with seasonal fluctuations in food prices no longer offsetting industrial deflation in certain months. The August 2002 figures, in fact, show a slight decline of 0.4 per cent in food prices from August 2001 - a trend that may intensify next year as China's agricultural markets are further liberalised.
The real drivers of CPI movements in recent years have been continued rises in the price of regulated services (particularly healthcare, housing rental and public utilities) and countervailing declines in the price of manufactured goods. While these broad trends remained unchanged in August from most of the past year, more detailed figures from the National Bureau of Statistics show a number of significant shifts at the regional and sectoral level.
The Chinese economy is still far from fully integrated, and CPI trends have varied widely from province to province. At one extreme, seven of the country's 31 provinces (including minority autonomous regions and directly-administered cities) showed rising consumer prices in August, despite the national trend of deflation. The CPI index for Qinghai rose by a startling 3.4 per cent year-on-year, while prices rose by 0.7 per cent in Shanghai and 0.5 per cent in Tibet. Given the weak pricing power of Chinese producers generally, these anomalous figures seem to indicate localised areas of shortage, possibly in the labour and property markets, in regions targeted for high-priority state investment. Qinghai and Tibet are among the most sparsely populated regions of the country, and rising prices there are a likely consequence of heavy infrastructure spending connected with Beijing's 'Go West' programme. Likewise, Shanghai has continued to receive preferential allocations of credit from China's state-owned banks, particularly for infrastructure development in Pudong New Area.
At the other extreme, some provinces showed CPI deflation rates well above the nationwide average: prices fell by 1.9 per cent in Shanxi and by 1.2 per cent in Anhui, Guangxi, Sichuan, Chongqing, Shaanxi and Xinjiang. Some of these figures may represent severe distress in particular product markets ?for example, coal in Shanxi and cotton in Xinjiang (provinces that might otherwise have been expected to experience price pressures generated by 'Go West' projects).
Technological progress
The bureau's breakdown of CPI trends by product category is equally revealing. The sharpest price fall was a 16.4 per cent yearon- year decline in communications equipment, highlighting the impact of technological progress in this sector. In other areas, however, price declines point to a worsening of overcapacity, even in markets where Chinese goods are internationally competitive. Textile prices fell 2.6 per cent year-on-year, which seems to confirm earlier indications of haphazard capacity expansion in the sector, such as a sharp rise in imports of textile machinery. This is happening several years before Beijing's trading partners will open their markets to apparel imports under the terms of China's WTO entry.
There are also signs of distress in the home appliance market, particularly for producers of television sets. Prices of 'durable consumer goods for entertainment purposes and their repair services' fell by 9.2 per cent year-on-year, indicating continued oversupply. The television set industry is certainly benefiting from foreign investment, especially by Hitachi, which has partnered with a Chinese firm to produce for the Japanese market. However, the shift to digital transmission format for high-definition television promises to make China's entire manufacturing plant obsolete within a few years ?suggesting that this sector may face employment pressure towards the middle of this decade.
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