Deflation remains a risk in China, economist warns

China should not ignore the risk of falling prices, or deflation, despite a trend in recent months for rising consumer prices, state media reported Sunday, citing a ranking government economist.
"Supply still exceeds demand overall in China's market," Yao Jingyuan, chief economist with the National Bureau of Statistics, said according to the People's Daily website.
Despite rising food prices, the prices of industrial products are declining, while the prices of services are stable, the paper quoted Yao as telling a forum on the Chinese economy.
A slow increase in Chinese incomes and the threat of unemployment are among the reasons why consumer prices may not rise and could even fall in the months ahead, according to the economist.
Deflation is potentially even more devastating than inflation, as the expectation of falling prices encourages consumers to delay major purchases, further depressing demand.
The deflation warning came after recent statistics showing a slowdown in the rise of consumer prices.
The consumer price index rose 2.1 percent from a year earlier, down from the 3.2 percent increase reported in January, the statistics bureau said recently.
Even more tellingly, consumer prices were down 0.2 percent in February from January, marking the first month-on-month decline since July, according to the bureau's figures.
Recent rises in the consumer price index have to a large extent resulted from higher prices of grain, which make up a large part of the typical Chinese consumer basket, Yao argued, according to the People's Daily.
"The grain price rose in the fourth quarter of 2003 mainly because of a grain shortage in the market," Yao said according to the paper.
China's grain production has been decreasing since 1998 due to a price drop, a situation that was further worsened last year due to floods and droughts, he said.
But the price rise of grain will not last long, as farmers have been encouraged by government measures to plant more grain this year, he said.
Yao's argument was bolstered by the bureau's statistics, showing February's rise was largely driven by a steep 5.6 percent increase in the prices of food items, with grain prices up by more than 17 percent.
Non-food prices rose only 0.3 percent in February from a year earlier, compared with 0.7 percent in January, according to the bureau.