In recent months, the word "deflation" has frequently surfaced in news stories and online discussions across Chinese social media platforms. According to data released by the National Bureau of Statistics, in March, the consumer price index (CPI) increased by 0.7 percent year on year but was down 0.3 percent from February. Given that China has adopted a moderately easy monetary policy, which normally would lead to fast economic growth, the atypical slow increase in CPI has led many people to worry that the country is sliding toward deflation. 

So, has deflation already begun? The answer is no. In economics, deflation is defined as a continuous decline in CPI for two consecutive quarters. Therefore, technically speaking, China has not entered a phase of deflation.

That does not mean that China can simply dismiss the possibility of falling into deflation. Since last October, a drastic price war has swept across China's vehicle sector. The huge drop in car prices was rooted in the prolonged weakening of consumers' intent to purchase cars. Like car prices, rental rates have also dropped in comparison to last year. Faced with a rising youth unemployment rate, many Chinese youngsters nowadays are more cautious about spending money on rent.

China has withstood the blows of multiple rounds of deflation. The major reason why China successfully recovered was the rise of several major drivers of growth, such as real estate and foreign trade. Therefore, the key to clearing the threat of deflation lies in the identification of a new engine of economic growth.

(Lifeweek May 22)