Chinese customers enjoy a meal of crayfish at a restaurant in Hefei, eastern China’s Anhui Province on Sunday.

China’s inflation weakened further in April as the economy was hit by its most serious slowdown in nearly two decades, but analysts said the risk of deflation causing any damage was abating.

“While headline CPI will likely continue to fall in the coming months and is expected to average minus 0.5 percent in 2009, the worst of deflation appears already behind us,” said Qian Wang, an economist at JP Morgan.

Consumer prices are keenly watched as they are among the most reliable indicators of activity in China, and recent declines highlight the impact of the global slowdown on the country’s trade-dependent economy.

The World Bank has forecast the Chinese economy, the world’s third-largest, will expand by 6.5 percent this year, the lowest rate of growth since 1990.

Compared with March, the CPI, the main gauge of inflation, was down 0.2 percent, the NBS said in a statement.

But Xu Jian, an economist at China International Capital Corporation, pointed to this figure as a sign of encouragement, as it had shrunk in comparison to a 0.3 percent fall from February to March.

He said that a four-trillion-yuan (US$584-billion) stimulus announced by China last year had helped boost domestic demand, which was why prices would find support and added that CPI would average minus 0.3 percent in all of 2009.

But he cautioned that prices would not reach positive territory in the short term.

“The overcapacity problem (in industries) is still very serious… and against this background, I think that the prices, in the short term, will stay in negative territory,” Xu said.

CPI dropped 1.6 percent in February, its sharpest fall since it fell nearly two percent during the Asian financial crisis a decade ago, HSBC’s economist Qu Hongbin said in Hong Kong.

“It will last for at least another several months,” he said, adding deflation was mainly due to external factors such as falling commodity costs, which limit policymakers’ ability to shore up prices.

Consumer prices in March were down 1.2 percent from a year earlier, according to previously released data.

In the first four months of the year, the consumer price index fell 0.8 percent from the same period in 2008, according to the bureau.

Deflation is a situation when a continued fall in prices encourages people to postpone buying products as they expect to get a better price later, but that in turn only serves to further slow the economy.

Wang of JP Morgan said government moves to increase gasoline, diesel and water prices had had some effect in countering deflationary pressure.

“There (also) appears to be expectations that airline and railway ticket prices could be increased soon. We expect reforms of the electricity pricing mechanism, which could result in higher residential electricity bills.”

Qu said the focus would remain on how to enable the economy to recover as soon as possible and further boost domestic consumption and investment, to offset declines in foreign demand.

In March, consumer prices were down 1.2 percent from a year earlier, according to previously released data.

In the first four months of the year, the consumer price index fell 0.8 percent from the same period in 2008, according to the bureau.

Source: AFP