China Consumer Prices Fall for First Time Since 2002

By Li Yanping and Nipa Piboontanasawat

March 10 (Bloomberg) -- China’s consumer prices fell for the first time since 2002 as food, clothing and fuel costs declined, threatening growth in the world’s third-largest economy.

Consumer prices dropped 1.6 percent in February from a year earlier, when they reached an 11-year high, the statistics bureau said today. The median estimate in a Bloomberg News survey of 10 economists was for a 1 percent decline. Producer prices fell 4.5 percent, the most in a decade.

The drop in prices raises the risk that deflation will become entrenched, prompting consumers to delay purchases, squeezing company margins and triggering wage cuts. Premier Wen Jiabao, who last week set a 4 percent inflation target for 2009, is relying on a surge in lending and a 4 trillion yuan ($585 billion) stimulus package to spark an economic recovery.

“Deflation, though a real concern, is expected to be a temporary phenomenon,” said Jing Ulrich, head of China equities at JPMorgan Chase & Co. in Hong Kong. The government may cut interest rates and banks’ reserve requirements and add measures to spur consumption to avoid “extended” deflation, she said.

The yuan traded at 6.8398 against the dollar as of 12:32 p.m. in Shanghai from 6.8402 before the data was released. The Shanghai Composite Index of stocks rose 0.5 percent.

“We can’t yet draw the conclusion that deflation has arrived,” the statistics bureau said in a statement. It cited falling raw-material prices and one-off factors, including the timing of a Lunar New Year holiday and blizzards that pushed up food prices a year ago.

Food, Metals, Oil

Food, which accounts for about a third of the consumer price index, fell 1.9 percent in February from a year earlier, with pork plunging 18.9 percent. Metal and oil prices have fallen because of weaker demand caused by the global slump.

The government’s efforts to reverse a slide to the weakest growth in seven years have included lifting lending restrictions on banks. New loans in February surged to more than 1 trillion yuan, more than quadruple the amount a year earlier, according to the statistics bureau statement today.

China’s decline in consumer prices was bigger than in Ireland, Taiwan and Thailand, the other places to report deflation in their most recent figures, according to Bloomberg News data covering 78 countries.

The U.S. reported unchanged CPI in January from a year earlier -- the first time it hasn’t risen since 1955. Prices were also unchanged in Japan.

Global Deflation?

A trend toward global deflation is becoming more obvious as the international financial crisis keeps spreading, Premier Wen said March 5 in his annual speech to China’s parliament, as he reaffirmed the nation’s 8 percent growth target for this year.

Still, European Central Bank President Jean Claude Trichet, who chaired a meeting of global central bankers yesterday in Basel, Switzerland, said deflation was “not something we consider a high probability at all at a global level.”

“The government has to make sure its stimulus package kicks in in time to boost domestic demand,” said Wang Tao, a Beijing-based economist at UBS AG. “Faltering global demand will result in exporters selling more goods back to China’s domestic market, adding deflationary pressure.”

Volkswagen AG last month reduced the prices in China of some locally made models by as much as 12 percent. House prices in 70 cities fell 1.2 percent in February from a year earlier, the biggest drop since data began in 2005, the government said today.

Spurring Spending

Temporary deflation in China may spur consumer spending and cut production costs, according to UBS’s Wang. “The current low-price environment has also offered an opportunity for the government to raise controlled prices such as utility prices including electricity and water,” she said.

China isn’t yet facing “typical” deflation, where falling prices are accompanied by shrinking loans and money supply and an economic recession, central bank vice governor Yi Gang said, according to the state-run Xinhua News Agency.

The central bank has “sufficient” policy tools to combat deflation, Yi said, without elaborating.

Likely declines in consumer prices from February through June won’t trigger “aggressive” interest-rate cuts, partly because the government’s stimulus package will be inflationary, said Sun Mingchun, a Hong Kong-based economist at Nomura Holdings Inc.

The central bank may make a single 27 basis-point reduction this year, taking the one-year lending rate to 5.04 percent, as “a symbolic reaction to deflation,” Sun said.

To contact the reporters on this story: Li Yanping in Beijing at yli16@bloomberg.net