China has begun to enforce a freeze on all government-controlled prices in a sign of the central government’s alarm about rising popular anger over inflation, now at the highest rate in over a decade.
The order freezes a vast array of prices still under the control of governments in China, ranging from oil, electricity and water, to the cost of parking and park entrance fees.
The implementation order, issued jointly by six ministries, follows the issuance of a more vaguely-worded announcement on the need to prevent price rises late last month by the State Council, or cabinet.
“Any unauthorised price rises are strictly forbidden...and in principle, there will be no new price-raising measures this year,” the ministries’ announcement said.
The news since the initial State Council announcement that inflation in August hit an 11-year high of 6.5 per cent appears to have galvanised the bureaucracy into a tougher stance.
“As inflation has gotten worse, the government may feel it had to toughen its stand,” said Qing Wang, of Morgan Stanley in Hong Kong.
Rising inflation is especially sensitive in the lead-up to the five-yearly meeting of the communist party, which is due to open on October 15 in Beijing and will choose the top leadership until 2012.
The sharp spike in inflation is largely due to higher food prices, because of a shortage of pigs after a disease killed millions late last year and earlier in 2007, and the rising cost of feed, a global phenomenon.
But Chinese leaders and economists are increasingly worried that the impact of inflation, and the subsequent government policy response, could cause severe problems for the economy.
“We have entered a very delicate stage of development,” said a senior Chinese economist, who asked not to be named.
Once solely a domestic concern, Chinese prices are now also an international issue, because of the possibility of higher import costs feeding inflation in large export markets like the US and Europe.
Beijing has already raised borrowing costs five times this year, both to cool lending and to prevent negative real interest rates, which provide an extra incentive for people to take money out of banks to buy shares.
China raised the one-year deposit rate to 3.87 per cent last week, which is about equal to the eight-month average for inflation, but well below August’s 6.5 per cent.
But higher interest rates may attract further capital inflows, adding to an already swelling stack of foreign reserves and the domestic liquidity fuelling the frothy property and stock markets.
Economists said the price freeze is the kind of administrative measure redolent of China’s former planned economy, but it may be less effective in China today.
“They will not be able to control the price of everything,” said Chen Xingdong, of BNP Parisbas in Beijing.
In recent months, numerous small protests related to inflation have been reported, with students at three universities in southern China boycotting canteen meals this week because of smaller servings forced by higher food prices.
China Uses Price Freeze vs. Inflation
♠ Posted by Emmanuel in China
at 9/19/2007 03:44:00 PM
Here is something interesting: The Chinese government is retaking the commanding heights of the Chinese economy as it imposes a price freeze on items still within government diktat in an attempt to control rising inflation. The country has been subject to occasional riots in recent times, especially over higher food prices. Returning to Economics 101, I doubt whether artificially imposed price controls will spur the supply of necessary commodities at lower prices. Instead, China may very well get Venezuela-style shortages instead of being able to appease the increasingly anxious proletariat as suppliers become unwilling to sell at government-set levels. It all goes back to China needing to undergo rebalancing. By keeping the yuan artificially weak all these years, China has depressed the purchasing power of its citizens. How long can this system continue? From the Financial Times: