China is close to deflation: report

Industrial overcapacity a factor in lowering currency liquidity

China is now skirting close to deflation, a newspaper affiliated with the central bank said Wednesday, triggering market speculation that the central bank will further ease its monetary policy to spur economic growth.

"Based on the latest monetary data and actual economic situation, China is now skirting close to deflation," Zhan Xiangyang, secretary-general of China Urban Financial Society, wrote in a commentary published in the Financial News, which is affiliated with the People's Bank of China (PBOC), the country's central bank.

The actual currency liquidity in China's economy is insufficient even though the money supply from the central bank has been increased, the comment said, indicating that industries with overcapacity and low investment efficiency used up a tremendous amount of capital but without frequent flow between businesses, which lowered the actual currency liquidity in -China's economy and increased the risk of deflation.

Chinese government officials have also warned of the rising deflation risk.

"It is necessary to pay close attention to the deflation risk but it's too early to say China has entered into deflation," Shen Danyang, spokesman for the Ministry of Commerce, told a press conference held on February 16 in Beijing.

Shen's words came days after official data showed China's consumer inflation in January hit a five-year low.

The consumer price index (CPI), the main gauge of inflation, grew at its lowest pace since November 2009 at 0.8 percent year-on-year in January, data released by the National Bureau of Statistics showed.

"We could not say China has entered into deflation as CPI still remained at positive territory, but the deflation risk facing the economy is increasing," Fu Bingtao, a senior analyst at the Agricultural Bank of -China in Beijing, told the Global Times on Wednesday.

During periods of deflation, consumers are expected to delay purchases based on anticipation of falling prices and companies also may put off investments due to the decline of sales revenue, leading to economy contraction, Fu said.

"To ease the deflation risk, China's central bank is expected to further ease its monetary policy to spur economic growth," Zhou Hao, an economist at ANZ Banking Group, told the Global Times on Wednesday.

The central bank said in a statement on February 10 that China will continue to implement a prudent monetary policy, and fine-tuning and modest adjustments will be made to support sustainable growth.

"We expect the central bank will ease its monetary policy by further cutting the reserve requirement ratio by 100 basis points (bps) and interest rate by 50 bps this year," Zhou said.

China's M2, the broadest measure of money supply, -expanded at a record low of 10.8 percent year-on-year in January, according to data from the PBOC.

Following the potential monetary policy easing, China's M2 is expected to expand by 11 to 12 percent during this year and the CPI may rebound to 1.8 percent in 2015, Zhou said.