The Chinese economy has enough capacity and resilience to sustain the slowing down of economic growth. The main function of the central government’s monetary and financial policies is to ensure the security and stability of the financial system, not to pursue economic growth, says an article in 21st Century Business Herald. Excerpts:

The consumer price index fell 0.5 percent last month from February, and increased 2.4 percent year-on-year. The producer price index declined 0.3 percent last month compared with February, and 2.3 percent year-on-year.

The continuous decrease of the PPI is not surprising, because of the overcapacity in some industries in China, which is caused by the government’s strong stimulus.

China is digesting the side effects of its stimulus package, and restructuring its economy. In this circumstance, profits in the industrial sector will certainly be affected.

But, under local government protectionism, the overcapacity in industry may not be weeded out.

Another downward pressure for the PPI in China is the fall of staple commodity prices in the global market.

The Chinese government has demonstrated a steadfast resolve to restructure the economy and solve overcapacity. It will tolerate considerable deceleration of economic growth, and will not resort to huge stimulus for temporary gains.

The Chinese government has already drawn the painful lessons that overcapacity in industries must be cut. If the government continued to carry the burden with further investments, China’s production efficiency and rate of capital return would drop to a very low level. If so, China could only sustain its growth through borrowing and investment.

In this sense, the PPI’s fall does not mean deflation, but a normal state of adjustment.

Some people believe that the moderate CPI change creates space for more slack monetary policies in the second quarter. That prediction is flawed in that it neglects the negative influence of loose monetary policies on the restructuring of the national economy.

An important factor affecting the CPI in China is the housing price. There are signs indicating the housing price increase is also slowing.

Of course, the depreciation of the renminbi and the weakening of the real estate market will lead to capital outflow. In case of a liquidity crisis, the central bank may increase its money supply, say, by lowering the deposit reserve ratio.