CHINA has plunged into deflation, recording its first drop in consumer prices in more than six years.
This is adding to worries about how the world's third-largest economy is weathering the global slowdown.
With the cost of food, clothing and fuel declining, the consumer price index -- the main gauge of inflation -- fell 1.6 per cent in February from a year earlier, the first dip since December 2002.
The producer price index, which measures business costs, fell even further -- by 4.5 per cent, the third consecutive month it has declined.
China's latest trade figures, due out today, are expected to reveal further falls.
Premier Wen Jiabao said last week that he expected China to meet a target of 8 per cent growth this year, but analysts say that the spectre of deflation could put that goal at risk.
Price falls raise concern about a persistent cycle of decreases, technically called deflation, as consumers put off major purchases, expecting costs to keep going down. The slowdown in sales pushes prices down further, making growth harder to achieve.
"Sustained price declines are concerning to policy-makers because deflationary expectations often lead consumers to defer purchases, resulting in further downward price pressure," said JPMorgan's chairwoman, China equities, Jing Ulrich.
The latest news from China, a day after Japan recorded its first current account deficit in 13 years in January, underlines the global nature of the downturn and reduces the prospect of China leading a recovery in the next few months. It underlined the importance of the meeting of leaders of the G20 nations including Australia's Kevin Rudd and China's Hu Jintao in London next month.
And it raised the likelihood of the Bank of China further cutting interest rates, perhaps as soon as Friday after business hours.
The central bank has tended in the past to adjust rates following announcements of significant CPI movements, although Wan Jianhui, an analyst with Beijing's South-west Securities, said the bank was starting to focus instead on industrial output and profits.
JPMorgan's Ms Ulrich said: "Deflation, though a real concern, is expected to be a temporary phenomenon."
The Statistics Bureau said new bank loans in February still exceeded $230 billion.
During China's annual parliament session, which opened last week, the Government has said it plans to reform power and oil pricing to allow producers more influence over the rates they can charge and to increase the minimum prices for rice and wheat by 18 per cent, as part of its package to support farmers.
Ms Ulrich said: "Sustained price declines are concerning to policymakers because deflationary expectations often lead customers to defer purchases -- resulting in further downward price pressure."
Prices should stabilise about mid-2009, Ms Ulrich forecast, as the $915 billion stimulus package announced in November started to be implemented, bolstering consumption.
Body: Mr Wen said in his state-of-the-nation address launching the National People's Congress session that the Government would give full play to the leading role of domestic demand, particularly consumer demand, in driving economic growth. It would encourage the purchase of cars and stabilise the real estate market.
Property prices in China's cities fell 1.2 per cent in February, the steepest decline in the four years that such prices have been surveyed officially.
A quarter of all investment goes in to real estate -- underlining the sector's crucial role in driving growth.
Human Resources and Social Security Minister Yin Weimin said yesterday the employment situation was grave.
Besides 20 million migrant workers having lost their factory jobs, 1 million graduates from 2008 remain without work. But after four consecutive months of falling positions for new workers, this has increased by 1 per cent in February -- only a moderate increase, but good news, he said.
Ms Ulrich said: "While the recent surge in money supply growth should translate into higher inflation, shrinking demand and excess capacity is instead generating deflation -- the symptom of industrial overcapacity, which has left companies with little pricing power."
China last fell into sustained deflation in the late 1990s, as it restructured its state-owned enterprises, causing millions of mainly urban workers to lose their jobs.
China's CPI has not sunk since December 2002. But after that, its manufacturing boom driven by the private sector deflated the world in a beneficial way.
As global economies boomed, the efficiency of China's factories kept prices down, holding inflation within a broadly acceptable range.
The major drivers of February's deflation were fuel, which fell 9.2 per cent, and meat -- chiefly pork -- and poultry, which fell 8.8 per cent. But the decline was amplified because Chinese New Year -- when spending usually soars -- occurred in February last year, but in January this year.
Also last February, China was being hit by severe snowstorms, further driving up prices.
Thus this February's spending was always going to struggle to measure up to the same month in 2008, which was a festival period, when the CPI rose 8.7 per cent, while this January's spending was inflated for a similar reason.
