Saturday, September 20, 2008

We all watch in horror as the government reveals more and more dairy items in which the chemical compound Melamine was found. A colleague of mine wonders why Chinese companies suddenly began to use such a harmful chemical on a product consumed by children. I have been wondering about the same thing myself.

It strikes me that the timing coincides somewhat with the imposition of price control on dairy products earlier in the year (February I think and more indirect measures even earlier). As I have argued in this blog earlier, the imposition of price control means either shortage or the deterioration of quality. In a purely planned economy, the result was shortage. However, in a quasi market economy, where SOEs are expected, indeed pressured, to generate profit, the result was the deterioration of quality. Below is the China Daily press release from February:

"During the price intervention period, operators' price increases must not be higher than the cost increase and the government can limit the manufacturers' profit rate and goods distribution difference rate. Operators must apply for a price increase to the local pricing department 10 days in advance of their expected increase."

Of course Sanlu was particularly egregious and might have started doing this a few years ago. However, the fact that 22 companies also engaged in using Melamine suggests that there was some industry wide pressure to generate profit in the face of price control. The inflation rate looks relatively good now because the price bureaus have apparently done their job by giving few price increases. However, the cost to consumers is deterioration in quality in essential food items. I would look for harmful chemicals being used in processed meats and poultry also......

Also, sadly, this is one of those instances in which some corruption might have caused a better outcome. Had Sanlu been able to bribe quality inspectors about diluted milk powder, many Chinese infants would have been a bit more malnourished, but still alive...

Then strangely, the NDRC website calls for even stricter enforcement of price control on baby formula. Why? No one is buying milk powder, so why is there the need to impose price control on it?!



I agree that the price control brought the qualify issue into question while it helps make CPI look good. Good CPI figure clears the way for generalist faction to loosen money supply.

I read from some forums that some sell-claimed insider argues that the situation is worse than is reported. He argues that in fact a chemical compound called UREA rather than Melamine was originally employed during the milk power production. UREA is cheaper and more dangerous than Melamine while Melamine is only a byproduct of UREA.
I looked into this last year -- remember the melamine in the pet food scandal?

Melamine makes it appear as if protein levels are higher than they really are, but keeps cost down, boosting profit.
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