China walks fine line to preserve growth while fighting inflation
Updated: 2008-01-26 10:24
Many factors are driving up inflation in China, some of them being felt throughout the world, and the government is turning to various methods to deal with the situation.
Some of these tools, like monetary tightening, are widely used. Others, like price caps and "moral suasion" in the form of warnings to industries, are viewed with skepticism in some economic quarters.
Indeed, they're not a common policy in post-reform China. Price caps have been imposed only twice in the past 12 years: in 1996, when the consumer price index (CPI) surged to a record high of 8.3 percent and in 2003, when China was affected by the SARS (severe acute respiratory syndrome) epidemic.
Analysts both within and outside China say that efforts to keep prices down, including by less conventional methods such as price caps on a small number of items, could be useful temporarily, but what's most important is what comes next.
Renewed efforts this week to control fertilizer prices were an example of central government preemptive actions that stop short of an order -- so-called moral suasion. On Tuesday, the top economic planning agency, the National Development and Reform Commission (NDRC), gathered executives of 30-strong nitrogenous fertilizer makers that control more than half of the country's supply.
At a meeting in Beijing, the NDRC cautioned the manufacturers against disguised price hikes or price rigging and said there would be penalties for such actions. The agency also said it might "overhaul" prices during the spring planting season two months from now. Prices of agricultural inputs have already risen sharply and could limit farm production, which would mean higher downstream prices later on in the year.
Other industries are under tighter scrutiny. In mid-January, 12 major producers and retailers of daily consumer goods such as edible oil, dairy products and instant noodles were told they would have to seek official approval for prices hikes of certain percentages within certain periods.
Analysts said that such 'administrative interventions' and a number of outright price caps could give the country a cushion against inflation, which has only become an issue of public concern in roughly the past year.
In the case of the consumer goods companies, Tang Min, vice-secretary general of the China Development Research Foundation, said freezes were "necessary" to avoid profiteering, hoarding and other activities that could drive up the inflation indices during the shopping run-up to the Lunar New Year, which begins on February 7.
And such actions do appear to get results, at least in the short term. An NDRC report showed that a previous clampdown had reduced liquefied petroleum gas (LPG) retail prices by 19 percent in major Chinese cities as of last week.
These actions could affect company profits, of course, and moves such as the talks with fertilizer makers get a quick reaction in the market. The day after the meeting, the mainland yuan-denominated A-share stock market was jolted, with agro-industrial companies especially hurt by investors' fears over the companies' profits.
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