Deflation likely in China

Dec. 12, 2008 at 1:35 AM

BEIJING, Dec. 12 (UPI) -- Inflation is easing in China but a Merrill Lynch report says China's economy could experience deflation as early as at the start of the New Year.

China's consumer inflation and wholesale price inflation have been dropping since the start of 2008, when economists were concerned about preventing the overheating of the economy.

At the end of November, China's annual consumer price index stood at 2.4 percent, down from 4 percent in October and from February's 12-year high of 8.7 percent. Similarly, the annual produce price index rate came down to 2 percent at the end of November, from 6.6 percent in October.

"We expect the CPI to drop to about 1.2 percent in December and become negative no later than February 2009," said the report by Merrill Lynch economists, China's state-run Xinhua news agency reported.

The economists said they expect the producer price index to move into negative territory before the CPI. They said the PPI could fall further on weakened demand for commodities, energy and other producer goods.

The Merrill Lynch report said China's central bank, the People's Bank of China, was likely to cut the benchmark one-year deposit and loan rates by another 1.08 percentage points before mid-2009. It also expected cuts of up to 3 percentage point in the reserve requirement ratio by mid-2009.

Zuo Xiaolei, chief economist at China Galaxy Securities, earlier predicted China's CPI would go down further in December, saying the inflation rate for all of 2008 would be less than 5 percent, or about the same as the 4.8 percent posted in 2007.

"Without proper policy support, deflation would be highly possible," she warned.

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