Stimulating domestic demand and trimming an oversupply of industrial and agricultural products remained two basic solutions to tame deflation, the article said.

To try and curb the problem, which had caused retail prices to fall since October 1997, China began some spending initiatives the following year to kickstart sluggish domestic demand.

The package included issuing stimulus bonds and state debts to finish certain projects, raising civil servants' salaries by 30 percent, and slashing bank interest rates.

The measures have played a very important role in easing the pressure and pushing the benchmark retail price index upwards.

The index, which has been known to fall for 22 consecutive months in the past few years, showed signs of rising in February this year.

The price of major industrial goods has also stopped plummeting and taken an upward turn this year.

In the first half of 2000, China's Gross Domestic Product increased by 8.2 percent compared with the same period last year.

The oversupply of products has eased off in the wake of China's move to direct its business loans to companies with marketable products, good earnings and credit-worthiness, while closing down companies with excessive supply and poor equipment.

But it should be noted that the achievement was mainly generated by State policy. The basis on which deflation had tapered off was not very solid and the effect was comparatively short-term, the article said.

Consumer spending was cited as an example. The report said that although it had increased by 0.1 percent in the first half of the year over the same period last year, this was mainly due to a shortfall in vegetable output and the housing and service sectors' moves to raise prices. But falling prices of major industrial and agricultural products were yet to be kept at bay, the article said.

Deflationary pressure was therefore still running high and stimulating domestic demand would be a long-term policy, the article pointed out.

In recent years, the government has taken many stimulus measures to goad people into spending, but consumption has not witnessed much change.

Given the dim consuming prospects and slow income growth, most consumers prefer saving to spending.

China's readjustment of its industrial structure and its reform of state-owned enterprises would inevitably lead to more people out of work, which to a large extent would stop urban citizens' income growing, the article said.

The bleak picture of farmers' income growth and the oversupply of agricultural products would not change in the short term, the report said.

Although China's medical care and housing reforms are already under way, they will take some time to complete.

With China's entry into the World Trade Organization on the way, more and more foreign agricultural products will flow into China.

This would, to some extent, whip up China's deflationary pressure, the article said.

Anti-deflation was a long-term and arduous task that the Chinese government would have to face in the near future, the report said.

While carrying out a pro-active financial policy as the main way to ward off deflation, the country should implement a stable monetary policy, the article suggested.

In recent years, with China's financial system reform deepening, Chinese banks' runaway credit has been largely reduced. But follow-up problems have surfaced. Wary of the financial risks which might emerge during the transition period, banks are reluctant to lend. Their caution has staved off the growth of social aggregate demand.

Because of the slowdown of monetary flow in recent years, monetary supply is likely to contract.

This all indicated that China still needed to implement its active financial policy within the next two years to halt deflation, the article said.

China should draw a lesson from Japan, whose promising pro-active financial policy failed because of its impatience to see results, the article warned.

To stem the oversupply of industrial products, the country should hurry up its industrial re-shaping.

State-owned enterprises should withdraw from some competitive industries, while other incompetent businesses should be phased out through market competition.

China should break through local protectionism, which was rampant in some areas, and take firm action to close down small companies causing heavy pollution and getting a low return, the article said.

The experience of other countries had indicated that industrial re-structuring was vital to lead a country's economy out of deflation.

To raise farmers' income, the country should speed up the urbanization of rural areas, the article said.

Currently, many surplus labourers still stayed in rural areas, it said. The urbanization process was a quick fix to this problem and an effective way of increasing farmers' income, which had a direct impact on farmers' purchasing power and could kickstart China's rural market.

As deflation was caused by many different factors, both short-term and long-term, the country had to be ready for the challenge, which could take years to meet, the article concluded.

(China Daily 10/12/2000)