In particular, NDRC allowed an approximate 7 per cent rise in the
still-regulated electricity price to consumers to cover 70 per cent of the cost
increase experienced by the electricity suppliers. This came a month after the
7th in a recent series of refined oil-product price increases.
Higher prices alone automatically solve much of the energy conservation and
energy efficiency issues China faces. Just this week NDRC's latest 1st-half-year
statistics show that low administratively-set prices have caused the nation's
energy efficiency to continue declining, especially in energy-intensive
industries (except for construction and steel where higher world steel prices
have reduced demand growth).
Hopefully the NDRC will next move toward "demand-side management" or
market-price-driven reduction in electricity, gasoline and natural gas demand
growth that enables producers to recover 100 per cent of their costs. NDRC can
do this by marketizing retail gasoline pricing and the demand side of
electricity, and by marketizing natural gas distribution and encouraging the
building and opening of an intercity natural gas pipeline grid that is operated
independently of production just like the electricity grid. An intercity gas
grid is needed to support a market for natural gas trading. It would also
deliver clean energy to all China's cities, including the gas from coastal
Liquified Natural Gas terminals, and the gas from coal mines, whose extraction
makes the mines safer and more profitable.
The third reason for ignoring prices and blaming the fixed RMB for
contradicting tighter monetary policy is the common misidentification of
inflation with price increases and ignoring that price increases are in fact
non-inflationary, especially when they prompt productivity or efficiency
improvements which raise both incomes and the supply of goods. Price increases
are actually counter-inflationary: they increase the demand for money, not the
money supply whose increase is defined as inflation.
It is what the People's Bank does or does not do in response to increased
money demand that is inflationary or not: It can expand credit or let interest
rates rise. And that is a very complicated judgment, informed by the fact that
any upward-biased effect on the RMB is neutralized by the higher goods prices.
If prices ever began increasing in anticipation of an inflationary monetary
policy, we would enter the bottomless pit of hyperinflation, which China's sound
monetary policy is nowhere near.
Accordingly, higher prices, not just of credit, can have the effect of
controlling economic growth. Allowing prices to adjust, ideally through market
mechanisms, precisely makes the policy of a fixed RMB exchange rate consistent
with any credit-tightening. The temptation, in a system of regulated prices, may
be to attempt to use a single blunt instrument, like credit-policy through the
People's Bank, to achieve an objective that is very complicated to co-ordinate.
Moreover, compared to markets, government regulation of prices or supply carries
the added burden of secrecy and a temptation of corruption, suggested by the
modest gas-pump queues seen on the eve of a gas price increase, or by the rise
in the stock-market price of energy producers when a price-increase is
announced.
The author is a Canadian and American investment banker, economist and energy
expert currently in Beijing.
(For more biz stories, please visit Industry Updates)
