Underlying deflationary pressure has risen in China, with the Consumer Price Index easing to the lowest 0.8 percent last month since November 2009.

The trend was even more evident in the decelerating contraction of the Producer Price Index. PPI deflation intensified to a 4.3 percent decline from 3.3 percent in December.

This is the first time that Zhou Xiaochuan has faced such intense deflationary pressure during his 13-year tenure as the country's central bank governor. The governor, who approved the 4 trillion yuan stimulus package - worth about $586 billion at the time, when the yuan was weaker - in the wake of the global financial crisis in 2008, may be more cautious this time.

Subdued expansion of broad money supply, a glut in the property market and a decline in transport costs caused by plunging oil prices, along with massive excess industrial capacity, are all signs of deflation. They remind policymakers to react appropriately to the situation.

Premier Li Keqiang is expected to announce the annual CPI and GDP targets in the Government Work Report during the two-week National People's Congress, which opens on March 5. Market observers speculate that the CPI target may be cut to 3 percent from 3.5 percent previously.

Deepening deflation will keep consumers from spending as they wait for still-lower prices, and companies will invest less capital into production as prices keep falling. That is the last situation the government wants to see.

Deflation happened in Japan when the real estate bubble burst in 1991. The impact lingers one-quarter century later.

Chinese policymakers have absorbed the lesson from their neighboring country. But at the same time, they are trying to avoid a large monetary stimulus, given that the corporate debt burden is far too heavy in light of intensifying overcapacity and declining profits.

"Officials need to balance the need for further policy accommodation against the risk of fueling asset bubbles and delaying needed structural adjustments," said Chang Jian, chief economist in China at Barclays Capital.

"But we would not rule out additional easing measures if inflation tracks significantly below our baseline forecast or if growth slows more sharply than expected," she said.

In the context of slower GDP growth, the expected decline in inflation to about 1 percent this year should lead the People's Bank of China to ease monetary policy further.

Two more 50 basis-point cuts in banks' required reserve ratio and two additional interest rate cuts of 25 bps each are likely, said Chang.

So is a willingness to accommodate yuan weakness against the dollar, she said.

Contact the writer at chenjia1@chinadaily.com.cn