China's consumer price index (CPI), a main gauge of inflation, fell 1.6 percent year-on-year in February, the National Bureau of Statistics (NBS) said Tuesday.

This was the first monthly fall since December 2002, when prices slid 0.4 percent.

The CPI was unchanged month-on-month, the NBS said.

The producer price index (PPI), which measures inflation at the wholesale level, fell for the third straight month, dropping 4.5 percent year-on-year in February, the NBS said.

It said in a statement that the February figure did not represent a deflation problem in China, since money supply was ample because of the proactive fiscal policy and the relatively easy monetary policy.

"We do face price downward pressure, but that cannot be translated into a deflation problem," said Zhang Xiaoji, researcher with the Development Research Center of the State Council, a government think tank.

Su Ning, vice governor of the People's Bank of China (PBOC, the central bank), said Tuesday that deflation would not occur given banks' ample liquidity.

FALLING WORLD PRICES

The NBS said falling international commodity prices, caused by the global economic downturn, contributed to the domestic price fall.

The high statistical base of comparison from a year earlier also contributed to the declines in prices, it said. Last February, inflation hit a 12-year high of 8.7 percent.

But during February 2008, prices were affected by transport disruptions caused by prolonged severe weather in much of China. Also, the Lunar New Year fell in February last year, rather than January as it did this year, and so holiday-related consumer spending shifted.

The agency said the CPI in the first two months of 2009 dropped0.3 percent from the same period last year.

The price declines "reflect how severely the economy was affected by the global financial crisis in the second half of last year," said Zuo Xiaolei, chief economist with Galaxy Securities.

It would not be surprising if prices fell further in the next few months, as both domestic and overseas demand had fallen since late last year, said Wang Xiaoguang, economist with the National Development and Reform Commission.

Also, he noted, there was a "commodity price bubble" early last year that persisted until mid-year.

FIGHT AGAINST DEFLATION

China spent years striving to contain inflation and runaway economic growth. But as the global slump began to affect the world's third-largest economy, the government shifted focus to fighting deflation and maintaining growth.

Yi Gang, PBOC vice governor, told Xinhua Saturday that the central bank had sufficient tools to fight deflation.

He noted the country had not confronted a typical deflationary period, which was characterized by contracting loans and money supply, a recession and falling prices.

To prevent deflation, real loan growth this year was expected to exceed 5 trillion yuan (735.3 billion U.S. dollars), Su said Tuesday while discussing the new price figures.

China's money supply rose by 17.8 percent and 18.8 percent in December and January, respectively. New loans hit a record of 1.6 trillion yuan in January, double the year-earlier figure, and are expected to have grown further in February.

MORE ROOM TO MOVE

Su told Xinhua on the sidelines over the weekend, during the annual sessions of the country's legislative and political advisory bodies, that China still had plenty of room to maneuver using monetary policy in the face of the global financial crisis.

He said the benchmark deposit and loan interest rates had been reduced five times since September and room for further adjustment was "smaller but still exists."

There's also "much room for cutting banks' reserve requirement ratios," which had been reduced four times since September, Su said.

China has set a full-year inflation target of 4 percent for 2009.

"The four percent target implies the highest inflation level China could endure this year," said Zuo. There was no danger of inflation in the next two or three years, she said, while deflation pressure was rising.

OFFSETTING DECLINES

Zhuang Jian, senior economist with the Asian Development Bank's China resident mission, said declining prices could hurt corporate profit margins and reduce their desire to expand production.

The declines are "an indicator of falling confidence amid the economic slowdown," said Ai Hongde, president of the Dongbei University of Finance and Economics.

"The falling prices indicate some industries have excess production, while consumers are unwilling to spend at will," he said.

He suggested the government should do more to boost personal spending, which should function along with the massive investment plans.

Deflationary pressure could ease in the second half of the year if consumption was boosted, he said.

Zuo said falling prices provided an opportunity for the government to further ease controls on commodity prices, especially those of farm produce.

Source:Xinhua