China's headline consumer price index (CPI) is on track to fall on a month-to-month basis in the coming months and mark a year-on-year decline in the second half of 2012, a government economist said in comments published on Friday.
But to prevent such an outcome, China must make a bold shift in its monetary policy to support growth, wrote Wu Qing, a finance researcher with the State Council's Development Research Centre, in the think-tank's newspaper, the China Economic Times.
China has corrected its excessive monetary policy tightening in the last quarter of 2011, but the speed and effort of turning-around are not sufficient, Wu said.
A typical deflation will emerge if policymakers do not take pre-emptive action, Wu noted.
Wu's comments showed that pressures from within Beijing are rising to force China's central bank to be more aggressive in relaxing its policies.
In December, China's CPI rose 4.1 percent from a year earlier and rose 0.3 percent from November.
At a routine State Council meeting chaired by Premier Wen Jiabao this week, Wen did not mention the general inflation in 2012 but said he wanted to see a pull-back of home prices and credit support for big infrastructure projects.
The People's Bank of China (PBOC) had announced a 0.5 percentage point cut in the required reserve ratio on the last day of November, but it has refrained from cutting the RRR further despite widespread market anticipation for such a move.
Zhang Chenghui, another researcher with the cabinet's think-tank, also wrote that the central bank should cut banks' required reserve levels many times in 2012 to ensure appropriate growth in money supply and bank credit.
The market has a shortage of money, and there is great room for the PBOC to cut RRR further, Zhang noted.
The latest Reuters poll showed that economists expect the central bank to cut required reserves by 2 percentage points in 2012, or four cuts of 0.5 percentage point. If the poll results prove correct, banks would be required to put 19 percent of deposits at the central bank by the end of this year.
(Reporting by Zhou Xin and Don Durfee)