Table 1 Main Price Changes in January-May 2002 (%)

　　Month Jan Feb Mar Apr May
　　Consumer prices nationwide Over a year earlier -1.0 0.0 -0.8 -1.3-1.1
　　Over preceding month 0.3 1.1 -1.3 -0.3
　　Accumulated -1.0 -0.5 -0.6 -0.7-0.8
　　Producer prices of industrial products Over a year earlier -4.2 -4.2 -4.0 -3.1
　　Prices of capital goods Over a year earlier -5.0 -4.7 -4.5 -3.4
　　Import prices of raw materials Over a year earlier -4.8 -4.6 -4.7 -3.8

　　(2) Direct causes of price declines

　　1. The price-pulling factors have weakened. In recent years, the government adjustment of the prices for some commodities and services has been the main force pulling up the prices. In 2001, for example, some regions raised the tuition fees, housing rent, the price of water for civilian use and other charges, thus forced the price indexes for the category of education, culture and entertainment and for the category of housing to rise by 6.6 percent and 1.2 percent respectively over the same period of the year before. In 2002, the central and local governments at various levels strengthened the regulation and control over the prices of the monopoly commodities and services, and improved the government pricing mechanism. As a result, policy-oriented price adjustments covered less items and the government ability to raise prices was weakened. At the same time, personal housing rents reduced after the housing reform, and the interest rate of housing loans was lower. From January to April, the prices of the above two items rose by 0.6 percent and 0.2 percent over the same period of last year, with their range of price rise being respectively 6.0 and 1.0 percentage points lower. Obviously, their ability to pull prices up has weakened.

　　2. The price-stabilizing factors have undergone changes. In 2001, grain prices began a recovery rise of 1.5 percent (national retail price index), thus bringing an end to the continuous decline of food prices in the preceding four years. Food prices in 2001 were at the same level of the previous year. That was the main factor for stabilizing the price level. In 2002, however, grain export in the first two months dropped by 10.7 percent while grain import increased by 79.1 percent due to the impact of China''s accession into the WTO. Because of the impact by imported low-priced grains and the improvement in grain production, grain prices began declining. The decline during the January-April period was 1.5 percent (consumer prices in 36 large cities). As a result , food prices dropped by 1.0 percent. This was due to the changes in the price-stabilizing factors.

　　3. The price-declining factors increased and all consumer prices declined. Technological advance has lowered the costs of cultural, educational and communication products and forced down their prices. Sustained market oversupply deepened the declining range of the prices of industrial and consumer products. After the WTO accession, the impact of imported products on the domestic market also restrained the prices.

　　4. The rapid growth of supply restrained a rebound in the prices of capital goods. Thanks to the rapid increase in fixed asset investment and industrial production, the rising demand for capital goods brought the prices of capital goods slightly up. As a result, the price declining range is small. Beginning from February, the monthly price comparison became positive. The rising market demand has not only led to a rapid growth of the supply of domestic capital goods but also the entry of the imported low-priced products into the domestic market.

　　(3) Prices for the whole year will remain at low levels.

　　The above analysis indicates that from January to May, the price-declining pressure surpassed the price-pulling force. The result was that the prices posted a negative growth. As to the price prospect for the whole year, the price-pulling factors include the central government policy to continue expanding government direct investment through the issuing of treasury bonds, the picking up of the world economy and the stabilization of the prices of the basic and raw materials on the international market. At present, the prices of copper, aluminum and steel are slightly higher, while the prices of petroleum and finished products are stable. The rebound of the prices of capital goods is stronger than the general price level and will play a positive role in pulling up the prices. The basic situation of structural overcapacity and the imbalance between domestic demand and supply will not change fundamentally. As there are lots of factors at both the demand and supply ends that are unfavorable for price stability, the pressure for price declines is still great. In addition, China has begun fulfilling its WTO commitments as from 2002. With lower import duties and increased tariff quotas, the prices of imported products on domestic market are bound to fall. This will intensify the competition between imported products and domestically produced products, and force down the prices of domestic products. We expect that throughout the first half of the year, the level of prices will continue the sliding trend at the end of last year. In the second half of the year, the level of prices is likely to pick up somewhat as a result of the gradual implementation of the macro regulatory policies and the gradual improvement of the world economic situation. For the whole year, the price trend of the first half will be declining while that of the second half will be rising. The general level of prices for the whole year will be lower than that of last year. Of course, a possible negative growth cannot be ruled out.

　　II. Root Causes of Continuous Price Decline

　　(1) Serious overcapacity is the basic cause of continuous price decline.

　　The general price level is a result of the interaction between the general supply and the general demand of the national economy. Therefore, the continuous declining of prices and even a negative growth undoubtedly are first and foremost a demonstration of the imbalance in the general supply-demand relationship, or more Accurately, a result of continuous general oversupply. But this is not the whole story. A more important question is what has caused the general supply-demand imbalance. Is it because the general demand has not increased fast enough, or is it because there has been a structural overcapacity at the supply end in relation to the structure and scale of the general social demand? Or if it is because of the existence of both factors, which factor is more important? Straightening this issue out is very important for understanding what is the essence of the continuous decline of China''s price level and what policy options should be adopted.

　　Through the analysis of the performance of the Chinese economy in recent years and at the present time, our basic view is that the continuous decline and even a negative growth of the general price level, which arose from a general supply-demand imbalance of the national economy, are related to both the demand end and the supply end. But the main cause or the main aspect of the contradiction is at the supply end. This is because judging from the growth changes of all categories in recent years and at the present time, we find it hard to come to a conclusion that the general demand has continued to be inadequate or that there exists a visible inadequacy of the general demand. As indicated in Table 2, the growth range of nationwide fixed asset investment has been at a basically normal level in recent years, except in 1999 when the growth range was markedly lower. In the January-May period of 2002, the investment growth rate (state-owned and other economies) was more than 25.9 percent. The growth of export demand was tangibly lower in 1998 and 1999 due to the impact of the Asian financial crisis. But it picked up later on. In the first five months of this year, export growth was 13.2 percent. In particular, export growth in May was 18 percent higher than that in the same period of last year. In the area of personal consumption, the general growth of retail commodities indicated that personal consumption has been basically normal. There has been no sign of visible declines.