theSun | WEDNESDAY MARCH 11 2009 17

business

Deflation grips China

as economy struggles
BEIJING: China fell into deflation
at the consumer level last month
for the first time in more than six
years, as ministers painted a gloomy
picture of the economy’s near-term
prospects.
The 1.6% drop in the consumer
price index (CPI) in the year to
February, which was bang in line
with a Reuters survey of 26 analysts,
gives the central bank ample scope
to cut interest rates further if need be
to boost the economy.
Goldman Sachs said now seemed
a “natural point” to lower borrowing
costs to ease the financial burden on
firms, which are battling a slump in
overseas demand and in domestic
construction.
Commerce Minister Chen
Deming and Industry Minister Li
Yizhong, speaking at a joint news
conference, both used the word
“grim” to describe the immediate
outlook for Chinese exports and the
manufacturing sector.
Li said he was encouraged that
power consumption had declined at
a slower pace in the first two months
of the year.
But he added: “The situation
of industrial production remained
grim.”
The year-on-year drop in the CPI,
reported by the National Bureau of
Statistics, was the first since Decem-
ber 2002.
Economists worry that, unless
China’s 4 trillion yuan (RM2.2 tril-
lion) stimulus plan kicks in soon,
these deflationary pressures will
intensify because the economy is
saddled with excess capacity at a
time of depressed demand.
Consumers who expect more price
declines in future may delay their
purchases, weakening the economy
and undermining corporate profits.
“I think this is the first sign of defla-
tion,” Qing Wang, China economist
for Morgan Stanley in Hongkong,
said of the CPI drop. “We expect an
additional policy response, mainly
to prevent deflationary expectations
from getting entrenched.”
Shanghai stocks recouped early
losses and ended 1.88% higher as
investors shrugged off the slide into
deflation and took comfort from
strong lending data.
Wang expects consumer prices to
decline 1% in 2009.
By contrast, the government
of Premier Wen Jiabao, who has
sought to bolster confidence by talk-
ing up the economy’s fundamentals,
expects inflation to average around
4%.
Mingchun Sun with Nomura
in Hongkong agreed the lapse into We expect
deflation was likely to be temporary. an additional
Inflation would return by the second policy
half of the year and reach 2.8% in the response,
fourth quarter. For all of 2009 the
CPI was likely to rise 0.6%. mainly to
“Considering the inflationary prevent
nature of the stimulus package, deflationary
we believe the People’s Bank of expectations
China will hesitate in cutting rates.
Therefore, we now expect just one from getting
more 27bp (basis point) cut this year entrenched.”
– down from three in our earlier – Qing Wang
forecast – and see that as more of a
symbolic reaction to deflation,” Sun
said in a report.
Protracted deflation is also de-
bilitating because it increases the
real burden on companies of repay-
ing debts. And, if the cost of money
is already close to zero, deflation
makes it impossible for central
banks to set negative real interest
rates. – Reuters

Asian stocks gain, but rise seen fragile

HONGKONG: Asian shares
rebounded yesterday from a three-
session losing streak, while the safe-
haven bid on the dollar retreated in
moves seen as a momentary reprieve
from concerns about the weak out-
look for the global economy.
Asian share gains were led by
banks, including heavyweight HSBC,
which has taken a pounding on
concerns about capital raising and
the dire state of the world’s financial
system.
However, Japan’s Nikkei aver-
age dipped lower to trade close to a
26-year intraday low, led by worries
about the global competitiveness of
the country’s drugs sector follow-
ing a US$41 billion (RM155 billion)
merger in the United States.
“It is hard to think that stocks will
turn to an upward trend given the
credit situation. The dollar is likely
to retain its safe-haven status,” said
Kazuyuki Kato, treasury department
manager at Mizuho Trust and Bank-
ing Co in Japan.
The MSCI index of Asia-Pacific
stocks outside Japan advanced 1.2%
after losing 1.7% over the previous
three sessions.
Confidence in policy makers’
efforts to revive global economic
growth will be key to a sustained
rebound in global equities, with
key indexes such as the Dow Jones
industrial average trading at 12-year
lows.
US Treasury Secretary Timothy
Geithner said on Monday that the
United States has taken more ac-
tion in recent weeks to tackle its
economic problems than other
countries have done in years, trying
to reassure lawmakers recovery ef-
forts are on track.
“We’re doing more in weeks than
other countries do in years,” he told
Reuters after briefing Democratic
lawmakers on the progress of the
Obama administration’s plans.
The rise in Asian shares was led
by a 2.5% gain in Hongkong stocks.
South Korea, Australia, Taiwan
and Singapore posted more modest
gains.
HSBC jumped 13.2% after news
of its upcoming rights issue had led
shares in the lender to slump on
Monday to its lowest since 1995.
Banking shares elsewhere also
advanced, with South Korea’s Woori
Finance Holdings up 6.2%.
Though Asia has been spared
the sort of writedowns of bad debt
seen elsewhere, the global financial
crisis is still spreading to regional
economies, sparking concerns as
companies cut borrowing and strug-
gle to repay business loans.
Among yesterday’s decliners, the
Nikkei slid 0.7% to 7,033.27, weighed
down by drugmakers such as Astel-
las Pharma. The average booked a
26-year closing low on Monday of
7,086.03 and it is hovering just above
a 26-year intraday low traded last
October of 6,994.90.
Investors are worried the Japa-
nese drugs sector will be less com-
petitive in the global market place
after Merck of the United States pro-
posed to take over Schering-Plough
for US$41 billion. – Reuters
Watchdog probes HSBC stock plunge
HONGKONG: Hongkong’s securities watchdog said yes-
Hanging terday it was investigating a last-minute stock exchange
on the sell order that wiped billions of dollars off the market
edge of capitalisation of banking giant HSBC.
One single transaction in the final moments Monday of
despair the so-called closing auction that winds up every trading
pg 19 day in the Chinese territory almost doubled the day’s
losses for shares of HSBC, which ended down 24.1%.
The shares clawed back almost 14% yesterday. But
Monday’s dramatic plunge erased more than HK$127
billion (RM60 billion) off the bank’s market capitalisation.
One of Hongkong’s leading stock commentators broke
down in tears live on TV as the share price collapsed. – AFP
‘Global growth could dip below zero’
DAR ES SALAAM: Global economic growth could dip
below zero for the first time in decades in 2009, Inter-
national Monetary Fund managing director Dominique
Strauss-Kahn said yesterday.
“The IMF expects global growth to slow below zero
this year, the worst performance in most of our lifetimes,”
he said at the opening of a conference in Tanzania on the
impact of the world financial crisis on Africa. – AFP