A shopper walks past an advertisement for an upcoming Hennes & Mauritz (H&M)store in Beijing on Monday. China Tuesday reported its first drop in consumer prices in more than six years.

China reported its first drop in consumer prices in more than six years on Tuesday, adding to worries about how the world’s third-largest economy is weathering the global slowdown.

Premier Wen Jiabao said last week that he expected the country to meet a target of eight percent growth this year, but deflation could put that goal at risk, analysts said.

Price falls are a concern because they cause consumers to put off major purchases, expecting costs to keep going down. The resulting slowdown in sales pushes prices down further, making economic growth harder to achieve.

“Sustained price declines are concerning to policy-makers because deflationary expectations often lead consumers to defer purchases, resulting in further downward price pressure,” said Jing Ulrich, an analyst with JP Morgan.

In the first two months of the year, the consumer price index was down 0.3 percent from the same period in 2008, the national statistics bureau said.

The State Information Center, a government think-tank, forecast that the consumer price index would fall one percent for the first quarter.

“It would not be surprising if prices fell further in the next few months, as both domestic and overseas demand has fallen since late last year,” said Wang Xiaoguang, an economist with the National Development and Reform Commission, according to state-run Xinhua news agency.

The statistics bureau also said producer prices, an indicator of trends at the wholesale level, were down 4.5 percent in February from a year earlier.

“It’s natural as the price of everything, including oil and foods, is falling,” said Ren Xianfang, a Beijing-based analyst with research firm Global Insight. “It’s a reflection of the global deflation.”

The statistics bureau argued that the massive inflation in February last year – a 12-year-high of 8.7 percent – made for a high base that further helped explain the falling prices last month.

The inflation figure was the first in a series of data to be issued this week, giving a first clue as to what has happened in the Chinese economy so far in 2009.

China’s economy, which is heavily dependent on exports, has seen growth slow as demand weakens because of the worldwide recession.

Overall growth in 2008 was nine percent – the first time since 2002 that growth dipped into single digits.

Since the crisis emerged last year, the government has introduced a four-trillion-yuan (US$585-billion) stimulus package and instituted a series of central bank interest rate cuts to boost the economy.

Chinese officials have said there are some tentative signs the package, announced in November, is having an impact, but the latest data indicated more would have to be done.

Su Ning, a vice governor of the central bank, was quoted as saying Monday that China had room for further interest rate cuts and other measures to help weather the global crisis.

China has cut rates five times since September last year, most recently on December 23.

Source: AFP