Chinese Economists Warn Beijing of Deflation Threat

Government economists have urged Beijing to put a stop to deflation before it drags down China’s struggling economy, the official China Daily reported Sunday.

In a recent report, a research institute under the government’s top economic planning agency called tackling deflation an “overwhelmingly urgent task,” the newspaper said.

Deflation is “threatening to undermine economic reforms, growth and stability,” the newspaper said, quoting a report by the Macroeconomics Research Institute of the State Development Planning Commission.

The warning underscores the difficulties the communist government has experienced trying to inject growth into the slipping economy. The leadership has announced that reviving domestic demand will top its annual policy-setting meeting in October.

But the China Daily said there was no indication what options the leadership is considering.

A massive, deficit-financed public works program started last year and four interest-rate cuts in 17 months have had only limited effect. With record unemployment caused by free-market reforms, consumers are seemingly too worried about losing their jobs to spend some of the $700 billion in bank accounts.

Although the government has succeeded in talking up a bull run on stock markets since May, economists have warned that economic fundamentals are too weak to keep stock prices high.

Deflation, the flip side of inflation, occurs when paltry demand and not enough money in circulation forces suppliers to drop prices. As of May, prices in China had fallen for 20 straight months. Under such conditions, companies may follow consumers, investing less and further dampening growth.

An unwillingness to lend by already heavily indebted state banks has been partly to blame for the slack demand, said Song Guoqing, chief economist at the China Securities Executive Council.

Song warned that banks have little incentive to lend. The government for years treated banks as an instrument of policy, forcing them to keep state industries afloat. Although banking reforms are underway, they have yet to take hold.