Deflation warning from central bank

0 Comment(s)Print E-mail Shanghai Daily, March 30, 2015
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China needs to be vigilant for signs of deflation and policy-makers are closely watching slowing global economic growth and declining commodity prices, central bank governor Zhou Xiaochuan warned on Sunday.

"Inflation in China is also declining. We need to have vigilance if this can go further to reach some sort of deflation or not," Zhou said at a high-level forum in Boao on the southern Chinese island of Hainan.

Zhou said that the speed with which inflation was slowing was a "little too quick," though this was part of China's ongoing market readjustment and reforms.

China is determined to keep the world's second-largest economy from taking the same path of recession and deflation that has blighted Japan for the past 20 years.

The People's Bank of China has cut interest rates twice since November and taken other steps to support growth, but economists believe it will be forced to take more aggressive measures in coming months if prices and the economy weaken further.

Zhou also said China had a "clear direction" in terms of interest rate liberalization -- a long-term goal -- although he added it was difficult to put a clear timetable on the move. He pointed to comments last year when he said deposit rates were likely to liberalized in one to two years.

Last week, Zhou said China could undermine structural reforms if it adopts an excessively loose monetary policy, while pledging to relax capital controls to help make the yuan currency fully convertible.

Zhou said yesterday that China hopes to work on streamlining foreign exchange regulations this year and that by adopting new rules it would eventually be able to achieve capital account convertibility.

China is also "cautious" about the wider global slowdown, falling inflation and tumbling commodity prices, Zhou said.

The price of oil, for example, is down by over 50 percent since mid 2014, aggravating a broader commodity price rout which has pushed down inflation in all the major industrial economies.

Earlier this month, China announced an economic growth target of around 7 percent for 2015, down from 2014's 7.4 percent, already the slowest in 24 years. But weak data so far suggests the new target may already be "at risk."

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