November 16, 2010 4:41 pm

China eyes price controls to fight inflation

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Chinese vendor

A vegetable vendor in Beijing. The average price of 18 staple vegetables was 62.4 per cent higher in the first 10 days of November against a year ago

China is considering a package of price controls and other measures to contain inflation which rose sharply last month and has become the principal risk to the economy.

The National Development and Reform Commission, China’s main economic planning body, is putting together a “one-two punch” of policies to limit food inflation, state media reported on Tuesday, in a sign that debate is breaking out over how to tackle rising prices.

Several major cities in China have announced plans to try to cap food prices, while two officials in Beijing also confirmed this week that the government was looking again at price controls.

Consumer price inflation rose to 4.4 per cent in October, well above the government’s 3 per cent target, after food prices increased at an annualised rate of 10.1 per cent over the month.

The surge in inflation has spooked domestic financial markets, with the Shanghai Composite index falling 5 per cent on Friday and a further 4 per cent on Tuesday on rumours about imminent interest rate rises and reports about price controls.

High inflation is potentially very damaging in China because as well as being a possible spark for political unrest, it could also encourage speculative investments by Chinese depositors who are currently receiving negative real returns on savings in the banking system.

In the face of mounting inflationary pressures, Beijing has already increased interest rates once and raised reserve requirements for banks on several occasions. Fuzhou city on the south-east coast announced price caps last week on four types of vegetable, while Kunming in the south-west has also announced price controls on vegetables.

The average price of 18 staple vegetables was 62.4 per cent higher in the first 10 days of November than over the same period the year before, according to a report by the Xinhua news agency on Monday.

The average price of the group of vegetables, which includes cabbage, cucumbers and potatoes, increased to Rmb3.9 ($0.59) per kilogramme. Garlic, which has been the subject of some speculative buying according to analysts, was up 95.8 per cent over the year before, while the price of ginger was 89.5 per cent higher, the report said, citing the Ministry of Commerce.

According to a report in the China Securities Journal, the measures being examined, in addition to price controls, include subsidies for consumers, a crackdown on hoarding food and other commodities and a policy of making city mayors responsible for the price of a set basket of goods, although it gave no details about how such a system would work.

Andy Rothman, an economist at CLSA in Shanghai, said that when the authorities announced a package of price controls in 2008 during a previous spike in inflation, they actually intervened very little in product markets. “It was a way of applying some psychological pressure on companies,” he said. “The primary objective of the government’s recent measures has been to make a political point that the Communist party is doing everything it can to avoid food prices going up too.”

Yao Jian, a spokesman for the Chinese Commerce ministry, said the government was releasing stockpiled supplies of pork and sugar to ease price increases, while it would also take steps to increase vegetable production.

Chinese officials have warned that loose monetary policy in the US could cause inflation and bubbles in developing economies. However, many analysts in China argue that domestic monetary policy is at the root of current inflation.

UN officials, who this summer played down the risk of a repetition of the 2007-08 food crisis, are increasingly concerned that prices could rise sharply next year.

The UN’s Food and Agriculture Organisation said this month that its food index rose in October to levels last seen during the peak of the food crisis in June 2008.

The 2007-08 crisis and the current price spike share worrying similarities, according to UN officials and agricultural economists. The major producing nations, such as Russia or Ukraine, imposed export restrictions on both occasions, while importers, such as China, responded with matching retail price controls.

China doubled the amount of new bank loans in 2009, while Ba Shusong, an economist at a think-tank connected to the State Council, the Chinese cabinet, said on Tuesday that new lending this year was likely to exceed the government’s Rmb7,500bn target. Rising wages could also fuel inflation, economists said.

Fan Gang, a former adviser to the central bank, said China should allow its currency to appreciate more rapidly in order to contain rising prices of soyabean oil and animal feed. A stronger currency “may be used as a policy to deal with inflation and that would not only be good for the control of inflation but also would be beneficial for the overall balance of the domestic economy and external economy,” he was quoted by Bloomberg as saying at a conference.

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