Market News International:

Last year's market price was lower than expected and the CPI (consumer price index) as well as the PPI (producer price index) were also weakening in December. How do you expect the CPI and PPI will go this year? What are the risks of deflation? You said the country should enhance through counter-cyclical adjustments to its macro policies, could you discuss some of the factors in macro policies that are worthy of attention?

Ning Jizhe:

The CPI growth last December was below 2 percent and the PPI growth also fell month over month. Last year, the CPI and PPI grew moderately at 2.1 percent and 3.5 percent respectively, which was as expected by the Chinese people. There are many factors affecting CPI growth, the most important of which is the relationship between supply and demand, including that of manufactured consumer goods and agricultural products. We have sufficient and diversified supply of agricultural products, stable grain output, and a portfolio of business models. The supply and demand of manufactured consumer goods is generally stable, with the supply of most of the goods being higher than demand. Now manufacturing needs to improve standards and quality for higher consumption demand. The relationship between supply and demand influences pricing. We can analyze these two in relationship with each other to grasp the trend of price changes. Of course, PPI is not only affected by domestic supply and demand but also by the changes in the price of global commodities. Domestically, supply-side structural reform helped to solve the troubles of traditional industries like excess production and subsequently low prices. Internationally, the drop in global commodity prices, especially of energy products, in Q4 also affected PPI growth, as China is already a key importer and exporter of capital goods. There are still some uncertainties ahead in 2019. Macro-economic research as well as research on market prices, should take domestic and international factors into account.

As for the potential "deflation" risk of some media concern, China has not seen overall deflation in the past 10 years, but there were some kinds of structural deflation factors in certain years. It is inappropriate to say that China faces the risk of deflation this year. Given the economic climate and other background factors, we expect that prices will see a moderate rise this year. Pricing changes are affected by the relationship between market supply and demand, and this leads to your second question on counter-cyclical adjustments to macro policies. Macro policies should not only deal with structural problems, key problems and key elements, but also take the balance of supply and demand into consideration. Counter-cyclical adjustments help reduce downward pressure of economic growth, while supply-side structural reform helps improve the relationship between supply and demand, as well as promote overcapacity reduction and structural deleveraging. At the same time, we should take stable overall demand into consideration. The government policy is very clear now that it will implement a proactive fiscal policy and prudent monetary policy. The proactive fiscal policy is to increase efficiency through bolder and more effective measures while the prudent monetary policy is to be "neither too tight nor too loose." The former involves cutting taxes and fees on a larger scale, substantially increasing the issuance of special-purpose local government bonds, and raising investment within the central government budget to channel more energy into weaker areas. Moreover, the finance department has made arrangements to improve efficiency in asset allocation and to enhance performance. The monetary policy should be "prudent," which implies that it should be "neither too tight nor too loose," and should maintain market liquidity at a reasonably ample level; keep proper increases for the scale of currency, credit and social financing; improve financing and credit structures by following the requirements of deepening supply-side structural reform; increase financial support for private enterprises; and smooth out the monetary policy transmission mechanism to increase direct financing to the brick-and-mortar businesses and small- and medium-sized enterprises, for the purpose of better serving the real economy. Therefore, the policy orientation is very clear.

Thank you.

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