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Reduction
in the overall price level of goods and services—or deflation—has
not typified America's economic landscape since the Great Depression.
But it has lately become an important and seemingly persistent phenomenon
in China, even though the nation's economy continues to grow.
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 During
the early 1990s, inflation accelerated in China. Expansions in industrial
capacity became overexpansions. By the mid-1990s, the Chinese government
had begun to respond with an austerity program that lowered inflation
from more than 20 percent in 1994 to 7 percent by the end of 1996.
By the end of 1997, however, the country had moved from slowing
inflation to absolute deflation. China's consumer price index for
March 1999 was down 1.8 percent, and its retail price index was
down 3.2 percent from a year earlier (Chart 1).
In part, China's
deflation may be seen as a response to other Asian nations' currency
devaluations and associated crises of the last two years. While
China has declared that it will not devalue its currency, the nation
could adjust to foreign competition indirectly through price deflation.
Argentina has allowed its economy to make similar substitutions
of deflation for devaluation in the present decade.
In an effort
to strengthen the economy, the government has been attempting to
stimulate consumer expenditures by easing credit. However, despite
repeated interest rate cuts, consumer demand remains weak. Moreover,
with falling prices and positive nominal interest rates, China's
real interest rates are still in the 7 percent range (Chart 1).
Despite a deflation
that analysts typically associate with output decline, China persists
in growing. Industrial output rose 8.9 percent for 1998 and shot
up 10.1 percent in the first quarter of 1999 compared with the same
period last year. GDP grew 8.3 percent in the first quarter year
over year.
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Dong
Fu is an assistant economist at the Federal Reserve
Bank of Dallas.
SUGGESTED
CITATION:
Fu,
Dong (1999), "China Deflates Despite Economic Growth,"
Federal Reserve Bank of Dallas Expand Your Insight,
September 1, http://www.dallasfed.org/eyi/global/9909china.html
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