The domestic economy still faces deflationary pressure, although some experts optimistically said the country's economy had stepped onto a stable and fast development track.

"The evidence was still weak that China had finally pulled out of its two-year fight against deflation,'' said Zhang Xueying, a senior economist with the State Information Centre.

The consumer price index (CPI), the key inflation gauge, rose only 0.1 per cent year-on-year during the first 10 months of this year due to price hikes of oil and steel on the international market.

As late as April, consumer prices fell 0.3 per cent from a year earlier, suggesting that the danger of deflation was not far off.

Meanwhile, the retail price index, which does not calculate prices for housing and service items, was still recording negative growth during the first 10 months.

The economist's view was echoed by Zhang Yingxiang, a senior statistician of the National Bureau of Statistics. "We are not 100 per cent convinced that deflation is over,'' she said.

But both Zhang Xueying and Zhang Yingxiang said the economy has turned for the better.

Statistics show that the domestic industrial sector produced 1.9 trillion yuan (US$230.8 billion) worth of products during the first 10 months of this year, due to more consumer spending, heavy State investments and soaring exports.

Exports soared 32.2 per cent during the period as a result of the recovering world economy, while imports rose 38.6 per cent due to a more active domestic economy.

During the period, fixed assets investment increased by 13 per cent to 1.59 trillion yuan (US$191.2 billion), as the central government continued to pour money into the economy.

Retail sales, the main indicator of consumption, rose 10.4 per cent during the period to 302.9 billion yuan (US$36.6 billion).

"But we should keep a clear mind that the overall supply and demand are still imbalanced,'' the statistician said. "More than 90 per cent of the country's products are oversupplied.''

Meanwhile, policy factors played an important role in expanding domestic demand from January to October.

Fixed assets investment greatly depend upon government injections and in particular, treasury bonds, she said.

China plans to sell a total of 150 billion yuan (US$18 billion) worth of bonds next year to finance investments in basic infrastructure, according to media reports.

"The government investment could help create demands, but it usually takes time before the demand is created,'' the statistician said.

But if the State encourages private companies to spend on infrastructure, the country could find a new way of economic development.

The government could take measures such as breaking up monopolies in certain sectors such as telecommunications and railways to encourage private investment, Zhang Xueying said.

Consumers could theoretically help pick up the demand by continued spending, but consumption has become an uncertain contributor in the months ahead, he said.

With an aim to lift consumer spending, the central bank has announced seven successive interest rate cuts over the past four years, having slashed interest on one-year deposits to 2.25 per cent.

A disguised interest rate cut in the form of a 20 per cent tax on income from bank deposits was also put in place in November last year.

The State has also taken other measures such as increasing salaries, providing compensation for laid-off workers and providing more pensions for retirees to encourage spending.

Furthermore, the government earlier announced a consumption-boosting, week-long National Day holiday and Labour Day holiday.

During the National Day holiday period, a total of 59.8 million people travelled across the country, which generated 23 billion yuan (US$2.8 billion) in tourism revenue.

"The central government could not expect Chinese consumers, which contributed 58.8 per cent to the gross domestic product growth during the first half year, to spend further as they have much more worries such as pension, medical care and children's education,'' Zhang Xueying said, adding that a nation-wide social security system has not been established.

The vast rural population, which have more desire to spend, lacks enough money.

(China Daily 12/03/2000)