Mon, Jan 26, 2009 - Page 6 News List

‘Wait-and-see’ mentality deflating China’s economy

AFP , ZHENGZHOU, CHINA

It has been six months since Liu Guojun fell in love with a 42-inch Japanese-brand TV at a local appliance store but he plans to wait a little longer before deciding whether to buy.

“I wonder if the price will drop because of the economic crisis,” said the machine shop owner in the eastern Chinese city of Zhengzhou, pointing to the 13,980 yuan (US$2,000) price tag.

“At the moment, it’s still too high, close to the average annual salary here ... I think 5,000 yuan would be a reasonable price,” he said.

Liu and millions of others like him form one of the most important challenges to the Chinese government as it seeks to save the economy from implosion by getting people to buy more.

Deflation is a common feature of a weak economy, and it is particularly devastating because it can be exacerbated by people’s state of mind.

As prices start to drop, consumers decide to put off major purchases, as they figure the products will be cheaper in the future, in turn causing the economy, and prices, to weaken further.

China is not yet experiencing declining prices but the chorus of economists expecting it to happen soon is growing louder.

Last week, the National Bureau of Statistics published data showing that inflation was rapidly approaching zero.

The consumer price index, the main gauge of inflation, grew 1.2 percent last month from a year ago.

It was the lowest in 29 months and marked a continued price softening after inflation hit a 12-year high of 8.7 percent in February last year.

The softening prices came as China’s overall economic growth slowed sharply amid the global economic crisis to 6.8 percent in the final quarter of last year, well off the double-digit pace enjoyed for the previous five years.

“China will sink into deflation this year, no doubt about that,” said Lu Zhengwei (魯政委), a Shanghai-based economist with Industrial Bank (上海興業銀行).

At the frontline of this battle is Wang Yanshuang, who sells washing machines at the Zhengzhou home appliance store.

“I’ve been talking all day long, almost without a break, to every customer who’s stepped in, but I haven’t had much luck,” said the 24-year-old, her hoarse voice testament to hours of futile efforts. “Almost every customer thinks prices will drop further due to the economic crisis.”

Beijing has launched a series of measures to boost consumption, including subsidies for farmers buying electrical appliances and a decision to give away 9.7 billion yuan to the 74 million poorest people.

China’s least well off will get between 100 yuan and 150 yuan each as a Lunar New Year gift.

The government also last week unveiled a plan to invest 850 billion yuan in the healthcare system, in an attempt to address concerns about a poor social safety net that makes many Chinese save rather than spend.

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