Editor's note: The following article was written by Zhang Liqun, an economist from the State Council Development Research Center, an important government think-tank.

The consumer price index (CPI) will remain basically stable this year, rising around 3 percent. It should be slightly higher in the first half, dropping back down in the latter part of the year.

Food, services and other industrial consumables account for 30 percent, 20 percent and 50 percent, respectively, of the CPI. The jump in prices last year mainly stemmed from rising food and service costs, leaving an elevated CPI in the first quarter of 2004.

Food prices are closely associated with grain supply and demand. Higher grain prices have stimulated planting: there were 545,000 more hectares planted at the end of 2003 than there were a year earlier. The summer harvest should put the brakes on climbing costs.

Prices for transportation, natural gas, water and electricity, influenced by the supply of coal, electricity and oil, are predicted to continue increasing. Medical care and education fees are rising as well. In general, food prices will maintain stable while costs for services will continue rising, albeit at a slower rate.

Supply continues to outstrip demand in industrial consumables, making it difficult for manufacturers to raise their prices even though their production costs are already elevated.

Climbing production costs should slow

Rising production costs last year mainly stemmed from high demand from manufacturers for energy, transportation and some raw material.

The supply of energy products and some raw materials picked up in 2003. For example, coal production hit a record 1.6 billion tons; electrical generation capacity in the first 11 months last year reached 1. 7 trillion kilowatts, up 15.5 percent. Production of steel and steel products reached 200 million tons and 214 million tons, both up 21.5 percent; and production of 10 black metals increased 20 percent.

But it will be difficult to maintain those levels this year. Building additional power generation facilities takes a lot of time, and production at some coalmines has already been excessive. Some problems have emerged in the realm of iron ore imports, and transportation capacity is restricted.

Fortunately, overall demand from manufacturers is being curbed since the government doused the flames on some overheating industries in the second half of 2003. For instance, it stopped approving the construction and expansion of development zones and slowed money supply.

The real estate and auto industries are the main contributors to soaring demand for energy, transportation, and chemical materials. Now, influenced by government policy, demand for housing and autos is under control.

In general, raw materials supply and demand should be well balanced and prices will remain stable. The forecast growth rate for raw materials prices is no more than 4 percent.

No inflation this year

In 2003, China's economy cast off the problem of deflation. Last year, loans increased 20 percent while investment jumped nearly 30 percent. However, worries about the possibility of inflation have gradually been escalating.

The real estate sector is one of the overheating industries. However, its growth rate slowed in 2003, although the average housing price still rose. With the acceleration of urbanization, housing supply will increase and prices will remain level. In addition, huge saving deposits and an adequate forex reserve should maintain stability in the price of capital.

China has become a buyer's market, with supply at its highest ever. Enterprises in general have great production capacity and can react rapidly to fluctuations in market demand. Supplies of capital, technology and labor are also adequate. Therefore, inflation cannot occur in spite of China's rapid economic growth, ample money supply and soaring demand.

(China.org.cn by Tang Fuchun, April 2, 2004)