Researchers see Chinese 2006 inflation at 1 pct

BEIJING, Apr 2 (Reuters) Chinese consumers will pay only 1 percent more for goods and services in 2006 as overcapacity pushes inflation down from last year's 1.8 percent, government and university researchers said in a report published on Sunday.

Deflationary pressures were rising, the team from the National Bureau of Statistics and Peking University said in a report carried by the Xinhua news agency.

''Inflationary pressure is probably less than deflationary pressure, so consumer inflation will continue to moderate,'' the researchers said.

''Judging from current price trends, inflationary pressure is not dominant in China,'' they said. ''On the contrary, deflationary pressure is strengthening.'' The researchers did not expect consumer prices to begin falling, thanks to China's rapid economic growth, but they would be only about 1 percent higher this year than last year.

Like other economists looking for reasons for deflationary pressure, the researchers pointed at an excess of productive capacity over demand from consumers, the result of overinvestment that the government has been trying to tame for several years.

But behind that overcapacity was a more fundamental reason: serious distortions in prices for economic resources caused by the absence of market-driven price systems.

The Xinhua report did not elaborate, but the Chinese economy has many examples of resources available at lower prices than would be on offer in a fully developed market system.

Government regulation holds down prices of electricity and automobile fuel, and developers often get land very cheaply from local governments that seize it from farmers, who complain that they lose their livelihoods without fair compensation.

State businesses have traditionally obtained capital cheaply from government-owned banks ordered to lend to them.

REUTERS MP BST1647