The Current Deflation in China: Causes and Policy Option

The Chinese economy showed the sign of overheating in the spring of 1993. As a countermeasure of overheating, the Chinese government began to implement a retrenchment program in July 1993 and the program lasted until 1997. The economic growth rate did not drop sharply because the program resulted in a soft-landing. The economic growth rate began a gradual slowdown in 1995 but has been maintained at a relatively high level (see Figure 1). After the Fifteenth Party's Congress in Sept 1997, the Chinese government switched the policy orientation, adopting a new package of policies to stimulate economic growth. However, different from the previous boom and bust cycles, which were heavily influenced by the government's policies, the efforts the government exerted through many channels so far have not yielded the expected effects. The investment and consumption demand showed no sign of strong increase and the GDP growth rate reached only 7. to 7.0% in the second quarter. During the period of soft-landing, the lowermost level of economic growth rate ever reached was 8.8% in 1997. From Sept, 1997 to now, the Chinese economy has not showed any sign of warming-up and market demand has declined continuously. From October 1996, the monthly wholesale price index of production materials, compared to the index in the