Monday, May 10, 2004

So, the Planning Commission decided to reimpose price control. My friend Bill Hurst at Berkeley was quite alarmed by the recent development, but I didn't think it was that bad. Here are his comments, my response, and the SCMP article below:

Bill: In another very interesting development, the SPC has just introduced what look to be pretty comprehensive price controls. SCMP calls it a "move reminiscent of the days of central planning". I think it may be just not very wise - do they really have to worry so much about inflation? Isn't overcapacity and tons and tons of slack the real problem? Wouldn't reigning in investment and capping supply be a better strategy than forcibly restraining prices? Most interesting to me though is the fact that the controls would really be implemented at the provincial level and largely at the discretion - apparently - of provincial officials...So much for combatting local protectionism and forging a national market.....

Me: This is very interesting news from China. However, I think the extent of price control is not as broad as the article suggests. The way that I read the SDRC announcement is that SDRC will only control the prices of those commodities still on the state-price list. According to the latest list I found on the SDRC website, only fuel, energy, fertilizer, medicine, tobacco and a few other items are still controlled by the state. I would be surprised if they start to reimpose price control on things they liberalized already. If inflation was over 20%, they might do it, but certain not now. I think they are saying that local governments which had plans to raise prices or administrative fees should put a stop to it for a few months. Of course, monitoring local behavior is another issue.

The SCMP article:

Monday, May 10, 2004

Mainland acts to keep price increases in check
If decreed limits are breached, localised control measures will be triggered


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The mainland's top economic planning body has issued limits on future price rises. If breached this will trigger localised price control measures in a dramatic move reminiscent of the days of central planning.
A statement posted on the State Development and Reform Commission website yesterday said the ceilings set included a 1 percentage-point increase in the monthly rate of consumer price inflation - or a 4 percentage-point rise in the annual rate.

In either instance, new projects that would worsen inflation are to be frozen by regional authorities for three months.

The mainland's consumer price index rose 2.8 per cent in the first quarter over the same period last year.

Although that is mild and even desirable after years of deflation, Beijing is concerned that with fixed-asset investment touching more than 40 per cent, inflation could soon gallop out of control.

That last happened in 1988, stoking popular discontent made manifest in the 1989 Tiananmen Square protests, and again in 1994, forcing the implementation of stringent credit control measures whose deflationary effects were felt for years. The directive comes after repeated pledges by Premier Wen Jiabao, who is touring Europe, to put a brake on the nation's economic growth and orchestrate a so-called soft landing for the economy.

Mr Wen and President Hu Jintao have toned down the return to go-for-broke economic growth that characterised the last years in power of former premier Zhu Rongji and former president Jiang Zemin.

The new emphasis on balanced growth is aimed at ironing out large and growing wealth gaps between coastal and interior provinces - and between city and countryside - that have stoked social tensions.

The commission's surprise directive also highlights just how concerned Beijing is about the economy - and how crude the control levers it has at its disposal are.

For most of the past 25 years, the mainland has steadily shed the price-control mechanisms that characterised decades of central planning. The prospect of their reinstatement - even on a local and temporary basis - marks a startling step backwards.

Such measures are consistent, however, with the government's recent precision-guided approach to macroeconomic management. Cooling measures have so far sought to restrict lending to specific sectors of the economy, with particular emphasis on industrial commodities such as steel and luxury residential property developments.

State leaders must contend with a continental-sized economy that is racing ahead at double-digit rates in some areas while others are mired in unemployment and poverty.

The commission hopes sweeping measures that would affect all provinces and industries can be avoided by empowering provincial price-control officials to take appropriate and feasible measures when inflation ceilings are breached.

The most drastic of these would be an increase in interest rates, which have not been raised in more than nine years.

Reflecting the government's delicate balancing act, the commission cautioned that local officials must carefully weigh the consequences of any price-control measures.

"Compensatory measures must be put in place to ensure that the living standards of low-income people will not be hurt," it said.

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