Experts warn China, whose economy enjoys a high growth and low inflation this year, will likely face the challenge brought by deflation and oversupply in the next two years.

Wang Xiaoguang, a researcher with the Macro Economic Research Institute of the National Development and Reform Commission, urges the central government to take measures to properly rein in investment in order to restrain supply, while encouraging domestic consumption to create a reasonable cycle between demand and supply and ease the pressure brought by increasing deflation.

On the top agenda of an ongoing national economic work conference in Beijing, which kicked off on Wednesday, is the issue how to increase domestic consumption and strengthen regulation and control in fixed assets investment, analysts here say.

Statistics showed China's economy grew 9.4 percent in the first three quarters this year, a drop of 0.1 percent from the same period of the previous year.

Meanwhile, CPI (consumer price index), grew only 2 percent in the January-September period of this year, down 2.1 percent year on year.

China's exports saw a big surge, while imports slowed down in the period, with the country's net export reaching record US$68.3 billion.

In the first three quarters ending on September 30, China's urban fixed assets investment witnessed an increase of 27.1 percent. Although the growth was down 3.9 percent from the corresponding period of last year, investment still seemed overheated, the analysts believe.

"All these figures indicate China's increasing power of supply," according to Wang Jian, secretary general of the Society of Macro economy of China, which focuses on the development of joint industrial investment funds between Chinese and overseas businesses.

Wang explained that the nation's slow growth in imports in the first three quarters indicate the country's weakening domestic demand due to the central government's macro-regulation and control policies.

Meanwhile, China's production capacity is increasing due to years of sustained high growth in investment. As a result, Chine saw a high growth in exports this year as the products have to go out to explore the international market.

The drop of CPI is also a result of the country's successive grain harvests in the past years, experts say.

Wang Xiaoguang predicts that China will face a grave oversupply in the year 2007 if the country's demand and supply structure can not be adjusted properly.

Generally speaking, he says, it takes five years for a project to be completed since the beginning of the investment.

Starting in 2002, China has entered a new round of economic growth. The growth in investment in the fixed assets surpassed 20 percent for three consecutive years.

The nation's production capacity as a result has started to release this year, leading to stockpiling goods, dropping prices and declining profits of enterprises.

In the middle of this year, the prices of steel, cement and aluminium began to decline, with steel prices falling by around 1,000 yuan (around US$125) per ton.

The productions of coal and electricity, which used to be short of supply in China, also show signs of overproduction this year.

The profits of enterprises, especially those engaged in energy and raw material sectors, were squeezed due to increasing production and tough competition on the one hand, and falling prices on the other.

In the first three quarters of this year, economic losses of the large scale industrial enterprises rose 57.6 percent from the same period of 2004.

Chinese economists have recently engaged in a dispute over whether the nation's economy is approaching deflation or inflation.

Wang Xiaoguang predicts there will be no deflation in China if the CPI can maintain a 2 percent growth the whole year this year. However, he warns of the risk of approaching deflation as the oversupply will be increasing in 2006 with the completion of a large number of projects.

In the latter half of 2006, China is likely to face a slightly deflation, he forecast.

Wang Jian says the next five years, or the country's 11th Five-Year Guidelines, will be a great challenge for China.

China has good experiences to deal with goods shortage problem under the planned economy. However, it lacks the experience to handle the issue of oversupply under the market economy, he says.

Facing the deflation pressure next year, Wang Xiaoguang suggests the central government to further restrain overheated investment and increasing supply on the one hand, and stimulate domestic consumption on the other.

(Xinhua News Agency December 2, 2005)