China’s consumer price index may stand at zero for 2009 and the nation may escape deflation because of “strong loan growth” and the government’s 4 trillion yuan (US$585 billion) stimulus package to spark an economic recovery, Zhang said.

Plunging prices have increased the risk that deflation will become entrenched, prompting consumers to delay purchases, squeezing company margins and triggering wage cuts. Premier Wen Jiabao, who this month set a 4 percent inflation target for 2009, is relying on a surge in lending and the support measures to spark an economic recovery.

Wen said March 13 the nation’s 8 percent growth target for this year is “difficult but possible” to achieve. People’s Bank of China Governor Zhou Xiaochuan said this week that leading indicators are pointing to an economic recovery.

Second quarter

“By mid-June, government leaders will have a better idea how well the stimulus package worked,” Jia Kang, head of the Institute of Fiscal Science under the Ministry of Finance, told reporters at Saturday’s forum. “Growth in the second quarter will be key for further policy moves, and if recovery is not seen the government is likely to roll out more stimulus.”

Wen said this month at the closing of the national congress that the government has “adequate ammunition” to add to its 4 trillion yuan stimulus package at any time.

“Economic indicators may look ugly this quarter because of the high comparative basis last year,” Jia said.

Inventories at local companies have started to fall and stockpiles may need replenishing in the second quarter, the central bank’s Zhang said.

“An increase in inventories will provide concrete proof industrial production and the economy is recovering,” he said.

China’s economy in the fourth quarter grew 6.8 percent from the same period a year earlier, lagging the 9 percent expansion for all of 2008 and 13 percent for 2007. Industrial output growth slowed, forcing thousands of factories to close and leaving about 20 million migrant workers jobless.

Domestic demand

“The rest of the year will be a struggle between coping with falling external demand and stimulating local consumption,” Zhang Yansheng, a researcher with the National Development and Reform Commission, said Saturday.

“Whether the government can achieve its 8 percent growth target hinges on domestic demand, and the government may need to do more.”

China’s new local-currency loans more than quadrupled from a year earlier in February to 1.07 trillion yuan ($156.6 billion), the central bank said on its website March 12, after it cut borrowing costs five times last year, scrapped quotas limiting lending and urged support for the stimulus plan.

Vehicle sales rose 25 percent in February and urban fixed-asset investment jumped 26.5 percent in the first two months from a year earlier.

Loan growth

Lending continued to rise in March and the growth “isn’t that much smaller” than in previous months, the central bank’s Zhang said, without giving a number. “We are likely to see sustained loan growth for the rest of the year.” The stimulus package is showing some results, he added.

Zhang at the reform commission, China’s top policy maker, said the country’s exports may fall 10 percent this year while imports may drop 5 percent. China’s trade surplus may shrink $200 billion this year, compared with a gap of $295.5 billion in 2008, he said.

The World Bank cut its forecast for China’s growth this year to 6.5 percent from 7.5 percent previously. The Organization for Economic Cooperation and Development said it will reduce its estimate this month to between 6 percent and 7 percent as the global slump deepens. The International Monetary Fund sees a 6.7 percent expansion, the least since 1990.

Source: Bloomberg