Wang Wei

Research Report No 164, 2002

The trend of market prices in 2003 will both demonstrate a stabilizing trend and face a downward pressure. If all macro-regulatory measures are proper and effective, the general level of prices will stabilize and perhaps can expect a modest rebound. We expect the consumer price index in 2003 to be roughly at the same level of 2002, and the commodity retail price index, the producer price index of industrial goods and the price index of capital goods to decline less drastically.

I. Features and Causes of Current Price Movement

(1) Price performance is in a new round of decline, with the general price level falling modestly for the past 11 months in a row. The general price level for the whole year is expected to be 0.5 percent lower.

Since the beginning of 2002, the performance of market prices has all along been in a low-level range and the general price level demonstrated a trend of continuous dip. Compared with the same period a year earlier, the general level of consumer prices nationwide dropped by 0.8 percent in the first nine months. In particular, the range of price dip in April fell to 1.3 percent, the largest fall since September 1999 when a 1.3 percent fall was recorded. In terms of chain index, the consumer price dropped by 0.15 percent per month on average in the first nine months. Compared with the 0.22 percent monthly decline in the second half of 2001, the fall was somewhat easing.

Economic performance and the price index of capital goods, the leading index indicating the changes of the general price level, have also been fluctuating in negative value since the beginning of 2002. The range of price fall in the first six months was respectively 6.3 percent, 5.4 percent, 4.9 percent, 4.4 percent, 3.8 percent and 3.1 percent. For the first half of 2002, price declined 4.7 percent, compared with the same period of 2001. The producer price index of industrial goods has also moved consistently in negative value. The fall in the first nine months was respectively 4.2 percent, 4.2 percent, 4.0 percent, 3.1 percent, 2.6 percent, 2.5 percent, 2.3 percent, 1.7 percent and 1.4 percent. For the first three quarters as a whole, the fall was 2.9 percent compared with that in the same period of 2001.

If we use the December 1997 figure as the base to examine the price performance in the past five years, we shall find a clear fact that the level of prices has been constantly falling. At the end of September 2002, the general level of prices was nearly 10 percent lower than that in December 1997. In particular, the general level of consumer price posted a 24-month-long continuous fall from April 1998 to April 2000, and posted a 15-month-long growth and a three-month-long zero growth from May 2000 to October 2001. The growth peaked in April and May 2001, respectively by 1.6 percent and 1.7 percent higher than that in the same months of the previous year. From November 2001 on and especially since the beginning of 2002, the general level of consumer prices has been in a new round of decline, posting an 11-month-long negative growth.

(2) While there have been no fundamental changes in the general situation of oversupply, the latest round of price decline is inherently inevitable.

First, the fact that there have been no fundamental changes in the general situation of oversupply is the main cause of the continuous fall of the general level of prices. Since 1999, the Chinese economy has been plagued by a relatively acute structural contradiction arising from oversupply. For years, the state has been sticking to a policy of stimulating domestic demand, and as a result, the demand of domestic investment, consumption and export all maintained a healthy growth. In 2002, in particular, all the three demands maintained a rapid or steady growth. But the situation of oversupply remained unimproved. According to the monitoring of the supply and demand of more than 600 main commodities conducted by the State Economic and Trade Commission, the proportion of the commodities posting oversupply were respectively 86.3 percent and 88 percent in the first and second halves of 2002, which were respectively 3.3 and 5 percentage points higher than that in the first half of 2001. In the meantime, the proportion of the commodities posting a basic balance in supply and demand fell from 17 percent in the second half of 2001 to 12 percent in the second half of 2002. Therefore, the continuous fall of China’s market prices in recent years has been a logical reflection of a buyer’s market, which means China has been facing a structural relative oversupply.

Second, the changes in pricing mechanisms have provided greater space for price decline. At present, the prices of most of China’s goods and services are determined by the market. Therefore, market mechanism plays a decisive role in price formation. In a situation where a buyer’s market continues to develop and market competition becomes increasingly fiercer, the continuous fall in price levels is a logical result of market selection. Comparatively speaking, in the first round of price decline, the prices of a few services and monopoly industries whose prices were set by the government were drastically adjusted, which played certain roles in containing the fall in the general price level and even in pulling up prices for a short while. With the government’s pricing methods becoming increasingly standard in recent years, however, the room for the rise of government-controlled prices has become very limited. For example, service prices surged only 2.4 percent in the first half of 2002, which was the lowest growth in recent years (service prices rose by 10.5 percent and 9.3 percent respectively in 2000 and 2001).

Another noteworthy change is that as a result of China’s more opening to the outside world and especially because of the impact of the country’s accession to the World Trade Organization, the country’s pricing mechanisms have become more open and the impact of the international market on the levels of domestic prices has also become increasingly tangible. 2003 is the first year after China’s WTO accession, and the tariff reduction and the increase of import quotas for grain, chemical fertilizer and some other commodities will further intensify the pressure on domestic market competition and will to a certain extent expedite the price decline on the domestic market.

Third, the technological advance featured by higher labor productivity is also an important factor forcing a continuous fall in market prices. The impact of technological advance on prices is mainly demonstrated in two aspects. One is that labor productivity is dramatically higher and production cost is sharply lower, which brings about a continuous downward movement of the prices of various commodities. Two is that the rapid development of science and technology has led to an endless emergence of new products, for which mass production capacities can be formed rapidly. This helps shorten the life expectancy of the products that have higher technological content and helps bring down their prices. One such evidence is the rapid dive in the prices of computers, communications products and household appliances in recent years.

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