Nikkei: 

My question is about the CPI. China's core CPI rose 0.7% in March from a year earlier. Despite the Chinese economy having started to recover after adjusting the COVID-19 response, the year-on-year increase in the core CPI is still low. How does the NBS view the main reasons for the stagnant core CPI? Is China's economy at risk of deflation? Thank you.

Fu Linghui: 

Prices are an important concern among the public. There has been a lot of discussion recently about whether China's economy is heading for deflation. Generally speaking, the Chinese economy has not experienced deflation at present, and there will be no deflation in the next stage. Deflation is internationally defined as a sustained decline in the general level of prices, often accompanied by a reduction in the money supply and economic recession. However, judging from the economic performance in the first quarter in China, consumer prices increased 1.3% year on year, maintaining a moderate rise. In terms of money supply, the M2 money supply soared 12.7% at the end of March, maintaining a relatively high rate of growth. In terms of economic growth, China's economy grew by 4.5% in the first quarter, up from the fourth quarter of last year. There is no deflation on the whole.

We have also seen falling CPI growth in the first quarter of this year. What's the reason for the drop? It is mainly affected by some time-related factors.

First, it is due to seasonal factors. Following the Chinese Lunar New Year, which fell in January this year, prices generally drop as demand declines.

Second, some food prices have fallen. As it gets warmer, supplies of fresh vegetables have increased substantially, with prices dropping both month on month and year on year. Thanks to this year's adequate hog supplies and reduced post-holiday consumer demand, pork prices have fallen. All these have led to a decline in the CPI. 

Third, energy prices have decreased. For China's CPI, energy prices have fluctuated with the international market. Since the beginning of this year, the global economy has slowed, and prices on the international energy market, especially the crude oil market, have dropped on the whole, leading to lower domestic energy prices. In March, gasoline and diesel prices fell 6.6% and 7.3% respectively from a year earlier.

Fourth, prices of cars, especially fuel-powered cars, have dropped. Due to the expiration of automobile subsidy policies and an adjustment to emission standards, automakers have recently increased discounts. In March, fuel-powered car prices fell 4.5% from a year earlier. All these factors have affected the change in prices.

Fifth, due to the impact of geopolitics and the COVID-19 pandemic, the price base was relatively high in the same period of last year. These factors have led to a decline in the growth of CPI prices year on year.

Although CPI prices have fallen, supply and demand remained basically stable. Excluding food and energy, the core CPI rose by 0.8% year on year in the first quarter, flat from January to February, and rising 0.2 percentage points from the fourth quarter of last year. In terms of service prices, the first quarter saw a year-on-year increase of 0.8%, up by 0.3 percentage points over the fourth quarter of last year. In terms of broader price levels, the CPI mainly measures price changes in the consumer sector. If we look at price changes in the economy, we should also consider GDP deflators, which posted slight growth in the first quarter of this year, picking up from the fourth quarter of last year. If all these are taken into consideration, there is no deflation. 

Going forward, prices will recover steadily, and prices' driving role will gradually strengthen. The so-called deflation will not appear. In terms of price performance, due to the high price base of last year, and the high rise in international commodity prices, as well as tight domestic supply affected by the COVID-19 pandemic, the CPI increase was relatively high in the second quarter of last year. As a result, the CPI increase in the second quarter of this year may remain low, but this does not mean there is deflation. As the influencing factors will gradually disappear in the second half of the year, prices will return to a reasonable level.