Power price pressure calls for balancing act

PUBLISHED : Thursday, 26 July, 2007, 12:00am
UPDATED : Thursday, 26 July, 2007, 12:00am

Growing pressure for the first electricity price rise on the mainland for more than a year illustrates the policy dilemma the central government faces over the sizzling pace of economic growth. Economic and commercial arguments for a rise run up against the political imperative of containing inflation, and defusing its potential for creating social unrest ahead of the all-important party congress in the autumn. The second-quarter consumer price index increase of 4.4 per cent, driven by rising food prices, was well outside the 3 per cent policy comfort zone.

Mainland electricity output is growing 33 per cent faster than the official rate of economic growth. That is a worry amid concerns about the economy overheating, because power generation is an indicator of economic activity. Moreover, a cap on power prices encourages inefficient production and wasteful consumption, contributing to the nation's growing pollution problems. Soaring demand and shortages of supply are spreading across the country.

The major generating groups are pressing for a price rise to cover increased fuel costs. It would give them a more realistic return on capital and costs that could be invested in building efficient, cleaner power plants and phasing out obsolete and polluting units.

Price controls to maintain social stability have squeezed the generators' profits. The government is sympathetic but fears triggering inflation if it loosens them. Thus it is caught in a catch-22 situation. It is a similar story with oil, where PetroChina and Sinopec are suffering heavy losses on refining because of the high crude oil price. Price rises for either product feed down through the costs chain to the consumer.

Mainland officials have not publicly conceded that the economy is overheating, although the government has reacted to the latest economic data by raising interest rates and cutting taxes on bank deposits to curb speculation on the share and property markets. The next few months will be a balancing act between the short-term political need to contain inflation and the policy goal of keeping growth within sustainable bounds.