By Zhang Xiangdong, Yang Wenyue
Published: 2008-06-18

Cover story , issue no. 372 June 16 2008
Translated by Ren Yujie
Original article:

The game of macro-economic whack-a-mole does not look likely to end any time soon for Chinese regulators struggling to get a handle on inflation.

With consumer prices growing at a less urgent rate in recent months, the National Development and Reform Commission (NDRC has now turned its attention to controlling soaring prices in coal, iron, steel, and other industrial materials.

On June 12, China's National Bureau of Statistics released the latest figures for the producer price index (PPI), which were 8.2 percent higher this May than they were during the same month last year.

The data has worried officials of NDRC even though the consumer price index (CPI) rose by 7.7 percent, lower than the 8.5 percent rate posted in March. An official from the NDRC told the EO that the PPI growth of May hit a three-year high, and would filter on to consumer prices within six months.

One NDRC official said that despite recent controls on electricity and coal prices, the PPI had continued to rise, forcing them to continue to look for other reasons. This then brought their attention to how continued investment in fixed assets had been increasing demand for materials.

Domestic prices of industrial materials, such as crude oil, coal and steel are still lower than international prices, and that such materials have yet to reach their peak costs. Officials from NDRC said the coming period would be the most difficult time for macro-regulation and control.

In a conference held two days before the PPI figures were released, the NDRC established that as the CPI declined, PPI would be the focus of regulation and control in the second half of 2008, and that measures toward this end were in the planning phase.

Prices Bumped Out of the Factory
Sources in the NDRC revealed that three measures would be carried out, including more controls over post-production prices, restrictions on the export of raw industrial materials, and regulation over investment in fixed assets.

Therefore, prices of industrial productions, steel and coal would be further controlled.

Officials from NDRC confirmed with the EO on June 11 that domestic prices of steel and coal would not rise now or in the future. Meanwhile, the NDRC has delivered an announcement to local governments, which demanded prices of materials used for reconstruction work in the disaster area, such as steel and cement, should recover to May 11 price levels.

A manager at China Iron and Steel Association (CISA) revealed that officials in the NDRC had held meeting with CISA to discuss the move of domestic steel prices before the announcement. The CISA held the position that domestic steel prices should be stabilized, and post-production prices after deducing the rise of international iron ore costs should be limited.

In fact, China's iron and steel businesses have raised ex-factory prices at least four times before May. Industry insiders said steel businesses could absorb the rise of international iron ore costs by merely increasing the cost of a ton by 500 yuan, but that they did not stop at increasing prices by just that amount.

NDRC did not totally agree with CISA in the conference. It demanded the industry to strengthen price self-discipline and administration.

Prices of petroleum and chemical producs also attracted the attention of the NDRC. On June 10, it required China Petroleum and Chemical Industry Association (CPCIA) provide figures related to production yields and prices. Xu Lixun, an economist at the CPCIA believed that NDRC might also intervene in agricultural prices.

Controlling Exports and Investments
Taking coal for instance, the international price of coal was several times higher than domestic price. As a result, impulse for domestic business to increase coal prices and exports has been constant. At the end of May, coal prices increased 10 to 50 percent, depending on type. Statistics from Chinese customs showed that China had exported 18.5 million tons of coal in the first five months, a 4.1 percent decline from last year, but that the value of such coal increased 48.3 percent.

Steel exports were experiencing a similar phenomenon. Qi Xiangdong, deputy secretary of the China Steel Industry Association, said the difference between domestic and international prices was the major reason steel export values soared.

According to an official from the NDRC, it was possible curb exports of related productions by raising customs duties. There were rumors that such duties for steel exports would be revised.

Another focus of regulation was to strengthen the supervision and control of investments. The NDRC official said the high growth of industrial materials' ex-factory prices were tightly connected with fixed assets investment. Such investment pulled up the demands for industrial materials and caused prices to rise even more.

Sources say that since May, the NDRC has demanded its local branches to submit reports on investment projects valued at over 50 million yuan.