China looks like it will soon slip into deflation. But will it be the good kind or the bad kind?
Steep falls in global commodity prices drove a drop in China's producer-price inflation to 2.0% in November from 6.6% in October.
That's the lowest level since April 2006, while data Friday is likely to show consumer-price inflation of less than 3% -- it was over 8% until May this year. On current trends, headline inflation indicators could turn negative in early 2009, economists say.
Gargantuan consumer of commodities that it is, China benefits from material costs deflation in a way that slower growing developed economies don't.
But deflation in China would become a problem if consumer expectations for falling prices become embedded. China's authorities want to see growth increasingly supported by domestic consumption rather than exports. Consumers who expect prices to carry on falling are more likely to keep hold of their cash.
The temptation for Beijing would then be to fall back on the export engine to support growth -- perhaps by allowing a devaluation of the yuan, something the U.S. and other countries would bridle at.
Beijing has policy measures already in train -- its fiscal stimulus package, rate cuts and moves to raise bank lending -- to bolster growth.
Whether they will prove timely enough to turn around the economy before deflation tightens its grip on consumer sentiment is becoming a key question for Chinese policymakers.
China may also be heading toward deflation
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Posted - 12/10/2008 : 05:54:55
