A Drop in Prices Doesn't Suggest Deflation
In the four decades since the beginning of China’s reform and opening-up，price increases have been more common than price declines. This trend has led the academic community to focus largely on understanding the origins，mechanics，impacts and solutions for inflation. Conversely，the study of price declines has received less attention. Through an empirical assessment of the growth rates of both the Consumer Price Index (CPI) and the Producer Price Index (PPI)，it can be seen that there were two notable price declines in China in 1998-2003 and 2012-2017.
When investigating the main causes and mechanics of these declines，a clear pattern emerges. While prices are significantly influenced by monetary factors such as 1monetary policy，this is the underlying logic that has led some scholars to attribute price changes to the effects of monetary policy. However，it is apparent that a variety of other factors can also influence price fluctuations. To effectively mitigate the effects of price fluctuations that are not caused by monetary policy changes，it is not solely dependent on monetary interventions. Studying the side effects and reactions to previous price recessions in China can enrich our understanding of price fluctuations.
Key Dynamics during the 1998-2003 Price Recession
Between 1998 and 2003，there was a decline in China’s CPI and PPI growth rates，with several years even recording negative growth.
The primary reason for this decline can be attributed to China’s first-ever surplus in a wide range of consumer products，following two decades of reform and opening-up. In 1998，more than 95% of industrial consumer items were oversupplied while essential commodities such as cereals and meats remained in tight balance. This surplus shows that the market has shifted from being seller-centric to buyer-centric，dispelling the misconception that socialist economies are perpetually deficit-driven and demonstrating the perpetually of socialist market models.
Moreover，the notion of inadequate effective consumer demand was overstated. The term “inadequate effective consumer demand” was coined by Thomas Robert Malthus in his book Principles of Political Economy in 1820. Capitalist economies often face a challenge of insufficiently robust consumer demand，which could potentially lead to a financial crisis. The Great Depression in the 1930s was marked by soaring unemployment in the US. Due to widespread bankruptcies of commercial banks，Americans saw their savings disappear. This has led to insufficient effective consumer demand for citizens lacking sufficient purchasing power. China's situation during the period of 1998 to 2003 exhibited a stark contrast from that of previous years. First，the increase in Chinese residents’ savings has been significant，with savings more than doubling from about 3.4 trillion yuan at the end of 1997 to over 10 trillion yuan by the end of 2003. This increase in savings has outpaced the Gross Domestic Product (GDP) growth. Second，in terms of money supply，the narrow money supply (M1) increased by a staggering 1.42 times，from 3,482.627 billion yuan to 8,411.881 billion yuan. The broad monetary measure (M2) recorded a growth of 1.41 times，from 9,099.532 billion yuan to 21,922.681 billion yuan. Growth in both narrow and broad monetary aggregates exceeded both GDP and CPI growth rates. This suggests that price cuts were not caused by inadequate monetary policy easing. Taking into account the consumption share of GDP，which rose from 59.9% to 63.9% between 1997 and 2000 (the highest in nearly 25 years)，it is difficult to justify consumption shortages.
In addition，a number of economic restructuring initiatives have been implemented，six measures are as follows. Firstly，the Ninth Five-Year Plan (for National Economy and Social Development) for the post-1996 period proposed a path of dual economic shifts: a shift in the approach to economic growth (from extensive to intensive) and the adaptation of the economic framework to better cater to a buyer-centric market. Moreover，proactive fiscal policy and prudent monetary policy were proposed after 1998，aiming at fiscal-monetary harmony. In addition，major enterprise reforms were vigorously deepened. From 1996 to 2000，a five-year reform was undertaken to strengthen the capital structure. Fourth，financial institutions have reinforced their asset foundations. Fifth，between 1999 and 2001，public housing reforms progressed extensively，underpinning the expansion of the commercial housing sector. Sixth，a comprehensive social security framework covering both urban and rural areas has been established through the establishment of a national social security fund.
Main Causes and Mechanics of the 2012-2017 Price Recession
China’s CPI recorded a steady growth rate of around 2% from 2012 to 2017. The reduction in prices is primarily concentrated in 54 consecutive months that experienced negative growth in the PPI. However，it cannot be accurately classified as deflation as a measure of CPI growth rate due to the decline in prices. In this phase，three factors underpinned the prolonged negative growth in PPI. First，following the 18th National Congress of the Chinese Communist Party (CPC)，China’s economy entered a period defined by three overlapping phases，which refers to that the shift period of economic growth，the painful period of structural adjustment and the digestion period of the previous stimulus policies. In order to sustain long-term economic growth，it was imperative to transition from rapid expansion to moderate but stable growth，which would provide a solid basis