Whether China will experience deflation is becoming a hot topic in the Western media. Specifically, the media discussion arose after the National Bureau of Statistics announced on November 15 that the consumer price index (CPI), which measures the change in prices paid by consumers, declined 0.2 percent in October from a year earlier and 0.1 percent from the previous month.

Deflation is largely the result of reduced consumer purchasing power, which can lead to a downturn in the overall economy. A typical example is the Japanese economy, which has been in a downward spiral for about three decades. According to Western economics, a sustained three-month decline in the CPI signals the arrival of deflation.

China's CPI for August was up 0.1 percent from the same period last year and up 0.3 percent from July; the figure for September was identical to the same period last year and up 0.2 percent from August.

All in all, whether it's year on year or month on month, the CPI figures for August, September and October have indeed been trending down, which justifies worrying about deflation in China. However, it is a premature judgment to say that the Chinese economy is facing deflation based on three months' worth of CPI figures alone. Consumer prices in China are the result of a number of factors and are subject to several influences.

The CPI in China is divided into two categories: food and non-food. Food items include grains, edible oil, vegetables, meat, aquatic products, eggs, dairy products and fruits. Food items account for 20 percent of the CPI, and non-food items account for about 80 percent.

Despite their high weight of 80 percent, non-food prices tend to be more stable than food prices largely due to long business cycles. However, fluctuations in food prices have a larger impact on the CPI, especially in terms of seasonality.

At the beginning of the year, the prices of items such as fruits, vegetables and eggs rose sharply, but in September and October, newly harvested grains, fruits and vegetables began to flood the markets, which subsequently led to a swift drop in their prices.

Meanwhile, non-food prices remained relatively stable. These prices increased 0.7 percent in October year on year, the same as in September.

China's core CPI—excluding food and energy—is still rising, up 0.6 percent year on year in October. From January to October, the CPI rose 0.4 percent year on year, with the core CPI up by 0.7 percent. Moreover, money supply has continued to increase, and the market presents adequate liquidity.

Therefore deflation is unlikely to hit the Chinese economy. However, this does not mean that we can turn a blind eye to the many problems plaguing the Chinese economy today, such as rising external uncertainty and weak domestic demand. The Chinese Government is now focusing on boosting consumer confidence, which will likely stabilize, and even accelerate, the CPI. 

Copyedited by Elsbeth van Paridon

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