Commodity prices are plummeting and weak external demand could exacerbate domestic over-capacity, the People's Bank of China said in a report analysing the impact on China's 2009 economy of the fourth quarter figures from 2008. "Against the backdrop of shrinking general demand, the power to push up prices is weak and that to drive down prices is strong," the PBOC said. "There exists a big risk of deflation."

China's consumer price index rose one per cent year on year in January. The PBOC added that China's economy faces further downside risks because of "slackening external demand, over-capacity in some sectors and increases in urban job losses"

Keywords : PBOC, Deflation, CPI

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