The jury is still out on whether China is experiencing a return to price deflation, but there are signs that the price recovery seen in 2000 largely reflected higher world oil prices, rather than stronger underlying demand. During 2001, oil prices declined substantially from the previous year, with an especially sharp fall after the September 11 attacks in the US. Those price declines appear to be showing up in China’s PPI index, but there are signs that demand weakness is also becoming more serious.
Producer prices illustrate the extent of the deflation problem more reliably than consumer prices, which have been supported in recent years by administered price increases for goods such as public housing and utilities. China’s index of factory-gate industrial prices fell by 3.7 per cent in November 2001 from a year earlier, a sharp worsening of the deflationary trend in recent months.
While the decline in world oil prices after September 11 may have played a role here, it was almost certainly not a decisive one. The pricing trend for durable goods looks especially worrisome, as production lags for these are too long for the post-September 11 oil price decline to have played any role in the November figures. A more likely explanation is weaker automobile sales in the wake of World Trade Organisation accession, as consumers hold out for cheaper imported cars. With China’s auto industry considered one of the most vulnerable to foreign competition, pressure on domestic demand is likely to worsen as the market opens to imports.
The consumer price index fell 0.3 per cent in December compared with a year earlier, the second consecutive fall in the benchmark inflation indicator. The National Bureau of Statistics attributed the fall to lower prices for food, clothing and medicine.
Growing competition has also led to a reduction in the price of air fares and automobiles.