China battles rising prices, snowstorms

With monthly inflation at 6.5 percent, Beijing applies its first price controls in 15 years.

from the February 1, 2008 edition

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A survey released in January by the Chinese Academy of Social Sciences (CASS) found that inflation is the No. 1 public concern among Chinese citizens, and the government has made the fight against rising food prices its top priority.

Administrative price controls, however, are hard to implement now that almost all food production, distribution, and sales are in private hands, economists say. If farmers or shopkeepers are not allowed to raise their prices in line with their costs, they will be tempted to hold supplies back.

"In some places there will be shortages," predicts Professor Xu. "It is a predictable result."

As a short-term measure to calm expectations, the price controls may have some impact, suggests Wang Cheng, an economist with CASS. "They will work for a period of time, but not so long," he cautions.

"Trying to use price controls to contain inflation is probably not wise ... and will be very difficult to impose," says Andy Xie, an independent economic analyst.

The government's plans have not been helped by the severe weather, which is expected to push food prices higher. "The impact of the snow disaster in southern China on winter crop production is extremely serious," Chen Xiwen, deputy head of the ruling Communist party's leading financial team, told reporters on Jan. 31.

He predicted that January's inflation rate would be around 6.5 percent, roughly the same as December's figure. US inflation rose .3 percent in December, by comparison.

The power outages that have made the cold even harder to bear in much of central and southern China have also highlighted the complexities of running an economy that is partly state-owned and partly private.

Nowhere is the confusion greater than in the energy sector, which is "stranded between the plan and the market" in the words of Philip Andrews-Speed, director of the Centre for Energy Policy at Dundee University in Scotland.

Power stations are constrained by a freeze that the government has declared on electricity prices, which has made them increasingly unprofitable as coal prices have risen.

Though weather-related transport difficulties have clearly contributed much to current coal shortages, market distortions seem also to be playing a role: Some power station managers have reportedly been selling their coal stocks, rather than burning them to generate electricity, in order to make more money.

The government has plans to liberalize the energy sector, which would mean lifting the freeze on electricity and gasoline prices, but while inflation is a threat, "this is not the right time to pursue such reforms" says Mr. Wang.

"The government could raise energy prices, but it fears the reaction on the street," adds Mr. Green.

Meanwhile, China's booming gross domestic product growth worries officials whose efforts to rein it in have not succeeded. Repeated government moves to limit credit – such as higher interest rates and directives to banks to curb their lending – have not dampened the runaway growth, which many economists say is fueling the inflationary spiral.

The international economic downturn could help slow China's economic growth in the coming months, given its dependence on exports to troubled economies such as America's. But Beijing acknowledges that it has little influence over the pace of a global slowdown. "There are uncertainties in international circumstances and the economic environment, and there are new difficulties and contradictions in the domestic economy," Prime Minister Wen Jiabao told his cabinet last week, in somber comments published on Jan. 28.

"We fear that 2008 will be a most difficult year for the economy," he added.

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