Reports have said the drought is not likely to reduce grain production notably, while the bumper harvests of the past five years have created enough reserve to offset any shortfall in output.

The lower PPI can be largely attributed to dropping commodity prices after the global financial crisis weakened demand and investment, the NBS said. For example, metal prices in January fell 41.4 percent year-on-year.

"We have to see to what extent the global financial crisis worsens," central bank governor Zhou Xiaochuan said in Kuala Lumpur yesterday. Bloomberg reported that Zhou's remarks were in response to a question on whether China could face deflation.

"Rapid disinflation (and deflation) is creating more room for further easing of the monetary policy," Morgan Stanley's Asia Pacific research team has said in a note. According to the team, China could cut the interest rate by 1.08 to 1.35 percentage points in the first half of this year.

The central bank has cut the benchmark one-year lending rate by 2.16 percentage points to 5.31 percent since last year after the government decided to ease the monetary policy to bolster the economy.

But some analysts cautioned against a rapid rise in inflation toward the end of this year because the government moves to relax lending and spur investment could help increase prices as the economy recovers.

(China Daily February 11, 2009)