Putting Food on the Table

It's Spring Festival time and with it comes the most brisk consumer spending of the year. Fully aware of this, the Chinese Government is deeply anxious about negative public sentiment over continuous price hikes, launching several policies to stabilize prices in the first half of January. These policies are expected to take the edge off a period when the majority are feeling the pinch in the place where it hurts most-their wallets.

However, whether these policies can really curb the pressure of inflation and regulate the upswing of a rampant consumer price index (CPI) remains to be seen. After all, when the market economy sparkles, price changes are mainly decided by the market itself, and not by government decree.

Firm measures

From January 1, China began to collect a one-year-long provisional export tariff on 57 categories of raw grain and powder products such as wheat and corn. At the same time, China also began to adopt export quota license administration on some grain powder products.

From December 20, 2007, China abolished tax rebates on exports of 84 categories of raw grain and powder products. The additionally collected tariff on these items shows the Chinese Government's intention to use taxation as a means to stabilize domestic grain supply and alleviate the overly rapid increase of consumer prices.

On January 19, Premier Wen Jiabao presided over an executive meeting of the State Council, stipulating temporary price freezes on gasoline, natural gas and electricity, as well as freezes on urban gas, water, heating and public transport charges, and fees for medical treatment will also be stabilized. Prices of major fertilizers, such as carbamide and phosphate fertilizers, will be kept steady too and can in effect only be raised on account of cost increases and after being approved by the regulator.

All these involve people's daily lives and agriculture capital goods. Zhou Maoqing, researcher at the Chinese Academy of Social Sciences (CASS), said stabilizing prices of public utilities and services is beneficiary to tackle social problems caused by inflationary pressure.

On January 14, the State Council held a televised conference in which local government officials throughout the country were instructed to secure market supplies and deploy measures of price regulation with immediate effect.

On January 15, the National Development and Reform Commission (NDRC) began to introduce temporary interventions on the prices of some important commodities and services, requiring 12 companies, such as Ting Hsin International Group and Uni-President China Holding Ltd., two big instant noodle makers, Luhua Group, an edible oil heavyweight, and major dairy firms Yili Industrial Group and Mengniu Dairy, to receive permission from the NDRC before raising prices. In these industries, the output of several large companies takes up a large share of the nationwide market.

Moreover, the People's Bank of China (PBOC), the country's central bank, also accepted suggestions from scholars, speeding up the pace of the yuan's appreciation. Some economists believe that faster yuan appreciation will reduce prices of imported commodities and then curb inflation. The yuan's exchange rate against the U.S. dollar rose from 7.3046 on December 30, 2007, to 7.2418 on January 17, almost creating a record high every other day.

A stable table

To some companies, the government's price stabilization policy comes as a warning, because many companies are not pressured to raise prices and do so simply to follow the trend set by others.

Master Kong, an instant noodle brand under the Ting Hsin International Group, one of the 12 companies that need permission from the NDRC before raising prices, saw its business volume surge 40 percent and the gross profit surpass 24 percent in the first half of 2007 when grain prices were increasing fast. But in July 2007, together with other instant noodle producers, it raised prices with the excuse of cost increases.

Dou Erxiang, researcher at the Financial and Industrial Development Research Center of Peking University, deems that the government's measures are of great importance, especially as a deterrent to companies raising prices in conspiracy or complicity, suspending or restricting supplies and hoarding profits.

According to Dou, it is estimated that the CPI still remained high in December 2007. In early 2008, some companies already began to raise prices to comply with market price trends.
Tough administrative measures being used by the Central Government to regulate prices are relieving a potential emergency.

Zhou Wangjun, Deputy Director of the Price Department of the NDRC, says that when prices are increasing, the country should first adopt economic and legal means to regulate them. The administrative measures now adopted are supplementary, aiming at preventing a rapid increase in price levels and establishing stability.

According to him, at present, China's fiscal revenue and foreign exchange reserves are increasing fast, while economic strength and regulatory capabilities are greatly improved. In addition, said Zhou, grain production has seen a bumper harvest for four consecutive years, pig breeding and edible oil plants are recovering, the supply of capital goods has increased markedly, and the supply of industrial consumer goods now exceeds demand. These factors indicate that the Chinese Government is able to stabilize the market supply and prices.

Illegal pricing

However, illegal pricing is becoming more serious, disturbing the market price order and corporate operations, something that has to be stamped out, in accordance with relevant laws and regulations.

"What the government intervenes in is the unreasonable price adjustments by some companies. After the spate of price hikes disappear, the government should lift the intervention measures accordingly," said Zhou.

However, Zhou admits that it is difficult to say when prices can stabilize.

According to the "Economy of China Analysis and Forecast 2008" issued by the CASS, China is in a period of price hikes and the CPI will rise about 4 percent in 2008, slightly lower than its 4.8-percent increase in 2007.

Zheng Chaoyu, professor of economics at Renmin University of China, said that the price increase will decline, but that it's difficult for the absolute price level to decrease.

In his opinion, the most important factor to decide price levels is cost. Take grain price as an example. Because of the increase of capital goods and labor prices, the cost of grain production is increasing. Conversely, as China's trade becomes more and more liberalized, grain price hikes on the global market have driven up grain prices in China.

January is the time for provincial-level people's congresses to convene their annual sessions. Faced with the surging prices, some deputies to the people's congress in Guangdong Province even proposed to adopt a system of using coupons for buying daily commodities if prices continue to rise.

Before the 1990s, China had adopted such a system. At that time, people needed coupons to buy grain, clothes, oil and meat. The root cause of this system was that commodities were in seriously short supply and had to be allocated to people through the use of coupons. In effect coupons can neither increase supplies nor help to tackle price hikes.

As online surveys carried out by websites such as sina.com reveal, stable commodity prices are the biggest wish of the Chinese people in 2008. NDRC's Zhou hopes this wish can be realized sooner, rather than later.