THE deepening eurozone debt crisis and a possible double-dip recession in the United States or Europe have recently dominated coverage of the international economy. But paradoxically a fallout from these trends, at least in the short term, should aid China in achieving an economic 'soft landing' - that is a mild slowdown from rapid economic growth accompanied by an uncomfortably high level of inflation.

The transmission mechanism aiding China is that the economic slowdown in the US and Europe is leading to sharp falls in international commodity prices. The Dow Jones-UBS Spot Commodity Index by the end of last week had fallen by 18.6 percent compared with its April peak - as seen in the chart. The fall in some individual commodities was much greater - international benchmark oil prices had fallen by 32 percent since May, and copper had fallen more than 30 percent.

These falls in specific commodities are already positively affecting China's price pressures - last week China reduced petrol prices by 3.2 percent and diesel prices by 3.5 percent.

The chief problem China has had to face is that until very recently international food prices remained stubbornly high. The Economist index of international commodity food prices peaked as recently as August 30. This has, however, now fallen by 16 percent. In addition to this exerting direct downward pressure on China's food inflation falls in commodity prices such as fuel will tend to reduce pressure on agricultural prices.

There is no reason to expect a dramatic drop. The fall in international food prices, which are crucial for China, are significantly less than the overall fall in commodity prices. But there is no longer significant international upward pressure on food prices, and falls have commenced, aiding China's fight against inflation.

Wrong analysis

It is important to draw attention to these international trends as some commentators had mistakenly attributed price rises in China primarily to increases in its own money supply. That such an analysis is wrong can be seen simply by looking at comparable BRIC economies where, taking the most recent data, inflation was 7.2 percent in Russia, 7.3 percent in Brazil and 9 percent in India. China's money supply expansion did not affect any of these countries but in all of them inflation was higher than in China. China's inflation was therefore clearly primarily rooted in international trends.

This decline in international commodity prices will give China's economic policy makers greater room for maneuver. As was shown in 2008, when it launched its stimulus package to confront the international financial crisis, China has more powerful mechanisms for dealing with economic downturn than the US and Europe. The US and Europe relied on indirect methods, such as budget deficits and "quantitative easing," to halt the investment fall which has been the core of the international economic downturn. China used state-owned companies and state-owned banks to directly stimulate investment. The problems of non-performing loans flowing from this are moderate, and readily containable, compared with the renewed banking crisis which is now hitting Europe and the US.

China also has additional instruments for dealing with inflation to those available in the US or Europe - direct control of prices and potential use of very large foreign exchange reserves for subsidized imports. But China's mechanisms for dealing with inflation, particularly that originating internationally, are not more powerful than those available to the US and Europe to the same degree as its mechanisms for dealing with economic downturn.

Source:shanghaidaily