Research On Current Risks Of Deflation In China And Its Influencing Factors

The economic growth rate of China has slowed down significantly in recent years. It became under 7% in 2015, which was the lowest for nearly 25 years. At the same time, the price of commodities remains low. In 2015, the Consumer Price Index(CPI) increased by 1.4% year-on-year, fell by 0.6% from 2014. Besides, by April 2016 the Producer Price Index(PPI) had risen negatively for 50 months and we still could not see any hope that it will turn positive. The continuous decline of CPI and PPI under the “new normal” economy reminds us that we should keep vigilant on the existence of risks of deflation. How to assess the present financial situation, find out the causes of deflation risks and making policies so that deflation will not happen have become issues that need to be addressed urgently.Firstly, this article analyzed the current situation of the risks of deflation in China, based on which I analyzed the probabilities that China will be in the situation of a stable price, inflation or deflation by the model of Ordered Probit. We could conclude from the analysis that although China has not yet totally fall into deflation, there are high potential risks that the government must pay high attention to. Secondly, I analyzed the factors that may cause deflation risks and came to the following conclusions: effective demand shortage and excess capacity are the fundamental factors; asset price, the expectation of deflation and currency are the main factors; external influence is also an important factor. Finally, based on the analysis of influencing factors of deflation risks, I provided a series of suggestions in hope of easing the deflation pressure and making sure the economic operate stably within a reasonable interval according to the “new normal”.