"Growing time deposits indicate that people's willingness to consume has begun to decline, which is a premonition of deflation," Zhao Jianxin, an analyst at China Merchants Securities Co. Ltd., told Beijing Review.

Set for a downturn

When circulated money is reduced, prices fall. According to figures released by the National Bureau of Statistics, the consumer price index (CPI) and producer price index (PPI) in October grew 4 percent and 6.6 percent, respectively, a decline of 0.6 of a percentage point and 2.5 percentage points from the previous month. CPI growth had declined for six consecutive months-an overall bottoming out of growth during the last 17 months-while the PPI saw its largest decline since November 1996.

"Various indicators such as an economic slowdown, shrinking circulated money and continually falling prices all foreshow the big risks of deflation," Zhao said.

According to the PBC monetary policy report for the third quarter, inflationary pressure has been markedly eased based on the domestic and international cyclical tendencies.

As financial institutions become more market-oriented and the confidence of producers and consumers keeps dropping, world economic growth has markedly slowed. On the international market, the prices of bulk goods have fallen, oil prices are below $60 per barrel, and future prices for copper, coal and farm produce also have dropped significantly. As international commodity prices have fallen, the growth of prices of imported goods has slowed down, which has been conducive to alleviating inflationary pressure in China.

The report also points out that in the international community, more economies are relaxing their monetary policies to deal with the financial crisis, so that large amounts of liquidity injections are likely to create inflationary pressure after the world economy recovers in the future. Therefore, China's monetary policy should prevent deflation in the short term but avoid inflation in the long term.

Zhao said the 4 trillion yuan ($585.65 billion) economic stimulus plan launched by the government on November 9 could prevent deflation from accelerating to some extent, but would not immediately dispel it.

Measures to be taken

In the years after the 1997 Asian financial crisis, China experienced deflation, which drove down domestic consumption. In order to prevent a recurrence of this situation, the PBC report says the central bank will strengthen its support in financing economic growth. Hence, the central bank has formulated six measures, including various preparations to ensure stable economic and financial operations in light of changed situations and strengthening cooperation with the international community to fight against the impact of the financial crisis.

The report says the central bank will ensure the financial system has sufficient liquidity and provide liquidity support for financial institutions in a timely manner. It also encourages commercial banks to loan money to businesses that need capital and relax loan restrictions.

Meanwhile, the PBC report holds that besides adopting direct financial aids, the government should also grasp the opportunity brought by the risks of the economic downturn to straighten out energy prices and regulate the consumer market.

The report points out that the country's economy still has great potential for growth, and its basic trend of steady growth has not changed. Under the circumstances of the sagging world economy and declining international commodity prices, the external forces that push up prices have turned slack. Therefore, China should grasp the opportunity to straighten out prices for energy, transportation and utilities in a timely manner.

Zhao said interest cuts would be the major means for the central bank to prevent deflation, and the possibility of further cuts could not be excluded.

The central bank increased interest rates over the past two years to curb inflation. In 2007, it raised interest rates six times with the benchmark interest rate for one-year deposits rising to 4.14 percent and that for one-year loans to 7.47 percent. This September, for the purpose of expanding domestic demand and boosting the economy, the central bank cut interest rates for loans for the first time in the past two years and then cut interest rates twice after that. The most recent cut was made on October 30 when the benchmark interest rate for one-year deposits was reduced to 3.6 percent and that for one-year loans to 6.66 percent.

Declined Indicators

1. GDP grew 9 percent in the third quarter, lower than 10 percent for the first time in the last three years.

2. Growth of broad money (M2) at the end of October was 0.28 of a percentage point lower than in the previous month.

3. Growth of narrow money (M1) at the end of October was 0.55 of a percentage point lower than in the previous month.

4. CPI growth in October was 0.6 of a percentage point lower than in September, the sixth consecutive monthly decrease.

5. PPI growth in October was 2.5 percentage points lower than in September, the biggest drop since November 1996.