Expert: China's Price Intervention Six Months at Most

Expert: China's Price Intervention Six Months at Most
From Nation, page 12, issue no. 355, Feb 18
Original article: [Chinese]
Translated by Ren Jie & Liu Peng

China's temporary price intervention measures have been in place for over a month. A government official has told the EO such measures would be lifted in time but declined to commit a deadline. Meanwhile, a researcher – who studies the trend of prices in China for years – has expressed optimism that intervention would be over in six months at the most.

Statistics released by the government in January showed continuous rises in prices for meat, eggs, edible oil, and vegetable produce. Since January 16^th, the National Development and Reform Commission (NDRC) has required 12 specific food companies-–including instant noodle producers, edible oil and diary products companies--to obtain government approval prior to making price adjustments.

The nationwide intervention, first in over a decade, harkens back to the days of China's planned economy and affected enterprises have expressed fear that their freedom to make business decisions would erode. Against this backdrop, the EO interviewed a spokesman from the NDRC and Wen Guifang, a member of the China Price Association's standing committee and a fellow at the Institute of Finance and Trade Economics under the Chinese Academy of Social Sciences.

The following excerpts from the interviews have been grouped by topics for comparison. Statements from the official started with NDRC, while views from the researcher began with Wen. 

Justifications for Intervention 

NDRC: The measure is in accordance with the Price Law. Its purposes include restraining unreasonable price rises, regulating market order and calming public expectations. Since last August, the prices of consumer commodities have increased by more than 6% for five consecutive months, prompting the State Council to intervene. There are two reasons to take this necessary measure: the first being that the prices of some essential commodities have gone up significantly, affecting both urban and rural residents, especially the lower-income ones. The other reason is that some enterprises are gouging consumers.

Wen: I think it is necessary to impose temporary price-intervention measures. Since last year, prices of commodities have been on the rising trend. To prevent prices from rising too much and too fast, the government is forced to intervene in order to stabilize prices and calm the public. We have learnt from past experiences that the Spring Festival is a peak season for spending, and thus prices are generally higher during this period. This year, the pressure to increase prices was even greater due to the unexpected snowstorm, which momentarily cutting off goods transportation before and during the festival. It is against this backdrop that the government intervenes.

Consequences of Intervention 

NDRC: The measure is a temporary and auxiliary policy... it does not erode the independence of enterprises in operating businesses or in fixing prices. Prices of major commodities and services in the country are determined by market forces. Firstly, it is legal. According to article 30 of the Price Law, when the prices of important commodities and services have gone up remarkably, or are showing signs of rising tremendously, the government - be it the central or provincial – can intervene. Intervention comes in the form of limiting the ratio of price differences and profit margins, setting ceiling prices, requiring enterprises to make prior application for price increases and report adjustments. Price-intervention is a practice adopted by all countries when overall prices have risen significantly, severely affecting the daily life of the public and destabilizing society.

Secondly, it is reasonable. Only a small number of commodities that are closely related to daily necessity were affected [by the NDRC move]. The measure is not a price-freeze and it will not affect the normal operation of businesses. Enterprises wishing to increase prices should submit application and provide justification; and the government will not intervene if the request is reasonable.

Thirdly, it is temporary. The 33^rd article of the Price Law specifies that when the pressure of significant price rise eases, such intervention must be lifted.

Though the measure is temporary,  the Price Law, Rules of Administrative Sanctions on Price Offenses and other regulations stipulate the legal consequences of non-compliance--enterprises will be punished and ordered to rectify.

Fourthly, it is auxiliary. The ultimate goal of the measure is to stabilize prices and increase production to boost market supply. The temporary intervention is to regulate the market, restrain unreasonable price rise and calm public expectations.

Wen: The measures may be able to keep the CPI index down, but price-controls do not necessarily lead to inflation-control. I believe the measures are only buying time, they may delay costs from rising but fail to solve the reasons behind rising costs. 

To some extent, price-control measures have distorted the market mechanism in determining prices. Under the market economy, government intervention by capping prices is like trying to stop water from flowing – the blockage will increase water pressure and burst sooner or later, actually increasing risk instead.

Thus, the "blockage" strategy is only a temporary and emergency measure to buy time for the government to consider other options. The root of the problem can be linked to cost factors, such as rising labor cost, and other external inflationary pressures. To treat the source of these problems, a combination of monetary and fiscal policies to encourage production and supplies are needed. In addition, allowing prices of commodities to rise in stages reasonably is the way forward.

The concept of "reasonable" intervention is hard to justify quantitatively. If a line must be drawn, I would suggest the bottom line be that no company should be forced into operating in red. When a company can no longer recover its costs, approval must be given for a price increase. Besides, it is generally agreed that a 5% rise in prices is acceptable considering the economic growth rate of China. Therefore, when the consumer price index has dropped below 5%, the price-control measures should be lifted. 

Does Intervention Equate to State-Planned Pricing? 

NDRC: No, it doesn't. A government-planned pricing mechanism means the state sets the price, but under the temporary price-intervention measure, enterprises are the ones suggesting what the price should be, the government only intervenes if the suggested price is unreasonable. In addition, if the government doesn't reply to a price rise application within a given deadline, it means the proposed hike has been approved.

Wen: The government expects businesses to undertake some social responsibilities while pursuing profits. However, businesses are unwilling to enter into losing deals. When under pressure, enterprises may look for counter-measures to cut costs, such as compromising on quality and reducing production. Prices of food commodities are on the rise due to increased costs, thus the demand of enterprises for price hike is understandable. The government can consider other means of intervention, such as providing subsidies. 

At present, 96% of the commodities in china are priced according to market mechanisms, the rest are set by the government. The commodities placed under the temporary price-control are few, thus, the measure cannot be viewed as a signal of government intervening market mechanism. 

I believe that government intervention will deliver results in the short run when accompanied by relevant monetary and fiscal policies that encourage production and ease rising costs. Subsequently, the price-controls will be lifted. I expect the pressure of price rise to ease in the second quarter of the year because problems of the pig breeding industry will hopefully be resolved by then. In addition, as the weather turns warmer in the coming months, food produce too will increase. I believe the price-intervention measure will be in place for about three to four months, or at the most, six months. Anything longer than that could spell trouble, but I doubt that would happen. 

(Note: The NDRC spokesman also outlined the major strategies in preventing price increases this year. In summary, the seven-point plan included: stabilizing prices through various macro-control tools; enhancing productivity in the agriculture sector through better infrastructure, sufficient supply of fertilizer and subsidies especially in areas affected by the recent snowstorm; ensuring the supply of food produce in the market and reducing the cost of food produce delivery; keeping the state-guided pricing products and services, such as oil and gas, water and electricity, public transport and school fees, to present level; intervening in the prices of daily necessities; enforcing price-related regulations efficiently; and finally, educating the public on how to change their consumption behavior.)