Price Plight for China's Macro-Watchdog

Translated by Liu Peng
From News, page 5 issue no. 377 July 21 2008
Original article: [Chinese] 

No matter if the producer price index (PPI) jumps or slumps, it would put China's macro-stability watchdog, the National Development and Reform Commission (NDRC), in an awkward position.

In June China's PPI hit a year-on-year growth record of 8.8%. In the first half of this year, the average PPI jumped by 7.6%, or 4.8 percentage points higher than the same period last year.

The figure was a hot potato for the Commission. Once the upward pressure of PPI filtered down into the consumer price index (CPI), it would only add to inflation pressure. However, if it failed to filter down, it would signify that the domestic investment was at risk of sliding.

Though fixed asset investments realized a year-on-year growth of 26.3% in the first half of this year, officials from the NDRC believed that if taking inflation into consideration, the growth rate was actually much slower, at 20%; and if the rate continued to slide, the overall health of the economy would be in jeopardy.

Officials from the NDRC feared that the real growth rate might be around 20% excluding inflation. Once investment in fixed assets slid, economic growth could be jeopardized.

Concerns of Decline
According to one NDRC official, newly launched projects across different sectors had experienced negative growth for five consecutive months, with exports also declining 5.7% during the same period. Besides this, the gross domestic product (GDP) grew by 10.1%, which was lower than first quarter's 10.6 % and 11.9% from the same period last year, according to the National Statistics Bureau.

The official said it was too early to tell if the Chinese economy had reached a turning point.

In a recent meeting held by the NDRC to analyze China's economic performance during the first half of the year, opinion was diverse - one camp was optimistic, saying that declining indexes were still within the band of expectation set by the central government earlier this year.

They stressed that as long as the GDP grew over 9% and fixed asset investment growth exceeded 25% in the following months, the government should continue to carry out fiscal policy to curb inflation.

Nevertheless, another camp expressed their concerns over risks in the economy. "Even if it was normal for real investment to fall 5 or 6 percentage points, if it continues to drop another 5 percentage point, the economy is likely to withdraw."

They added that with such tight credit controls, a rising PPI had led to a sharp rise in investment costs and had restricted investment demands.

Zhang Hanya, vice-chairman of the China Investment Association, said to some extent, the price rise in industrial raw materials would have an impact on investment, especially public projects.

In addition, the increasing investment costs from the rising PPI had affected local economy, where there were fewer projects breaking ground. "If there was no earthquake or Olympic Games, the decline in the real investment would be much more serious," said Zhang.

These pessimists suggested cutting corporate income taxes and expanding channels for financing for medium and small scaled businesses to boost growth.

Inflation Pressure
The NDRC has estimated that industrial consumer good prices make up 41% to 45% of the total consumer price index.

According to the China Logistics Information Center, the prices of iron and steel respectively rose by 78.4% and 41%, resulting in a jump of the average price of ferrous metal by 42.8% in the first half of this year. In turn, the ferrous metal price jumps made up 58.5% of the increase in consumer goods prices over the same period.

Besides this, coal price rose by 35.8%; processed oil prices jumped by 19.6%; and chemical product prices climbed by 15.1%. Those rises caused an increase of 2.57 percentage points in the producer goods price level. Construction material prices were still soaring.

The NDRC officials said if investment demands in the downstream industrial chains were boosted, the price rise in steel, energy resource and other raw materials would eventually push up the consumer price index.

Two weeks ago, the price department of NDRC held a meeting to discuss the stabilization of commodity prices in Shandong province. Attendees agreed on the need for continued efforts to smooth over price spikes and to implement price intervention policies for basic living commodities, electricity , coal, and the post-quake reconstruction materials.

However, price intervention measures have aroused many concerns now. Wen Guifang who directs price research at the China Academy of Social Science, said that since 2003, the growth of PPI had been higher than CPI, and that the sustainability of businesses downstream in industry chains had become overwhelmed.

If the situation continued, he said, such businesses would either go into bankruptcy or have to raise prices.

Wen thought that the NDRC's recent deliberation on revising the government-set pricing catalogs was a good signal and implied the loosening of central government pricing controls.

One NDRC official expressed that the price intervention was not a permanent solution, while the loosening of price control would be the way forward.