In an interview with Xinhua News Agency, Vice Governor of the People's Bank of China Yi Gang said the central bank has adequate monetary policy instruments available to deal with deflation and China is capable of combating the financial crisis.

Adequate instruments to combat deflation

"Influenced by the slump in the price of commodities like crude oil and the drop in foreign demand, China is currently facing obvious downward pressure on prices," Yi Gang said. "But the current situation differs significantly from typical deflation."

Typical deflation means an ongoing decrease in general price levels and a decline in credit availability and money supply, accompanied by economic recession (negative growth in GDP.) But at present credit availability and money supply in China have increased, and China is confident of hitting its 8 percent growth target, so China's situation is far from the typical deflation.

In addition, Yi Gang observed: "Recently China's central bank made the fight against deflation its priority, mainly to prevent further downward pressure on prices."

According to Yi, China has adequate monetary policy instruments at its disposal to deal with deflation. The steady increase of available credit indicates that China's monetary transmission mechanism is currently functioning smoothly.

Limited room for maneuver does not mean no scope for interest cuts

In order to combat the financial crisis, all of the world's major economies have been cutting their interest rates. Yi Gang pointed out that China still has some scope for interest rate cuts, but it is limited, as current interest rates in China are broadly in line with those of America. Bringing rates down close to zero is certainly not the optimal choice in the current situation, he said.

However, Yi added: "Although the scope is limited, that does not mean there will be no further interest rate cuts – for the time being there are too many uncertainties in relation to the economic crisis. When implementing monetary policy China will take global factors into consideration, in order to enhance coordination with other countries' central banks. In the long run, the RMB is forecast to be a strengthening currency."

Asked whether China will continue to buy US Treasury debt, Yi Gang said that the decision will depend on investment security and the quality of returns.

(China.org.cn by Ma Yujia, March 9, 2009)