Beijing's bold, but risky, cap on food prices

PUBLISHED : Thursday, 17 January, 2008, 12:00am
UPDATED : Thursday, 17 January, 2008, 12:00am

The tough measures introduced yesterday to cap soaring food prices on the mainland clearly signal that Beijing is seriously concerned about inflation - and determined to combat the problem. These are the most stringent controls on the prices of basic necessities for 15 years. Their introduction shows that even as the mainland continues to move ahead with free-market reforms, the government is not afraid to use tough administrative measures when it believes they are necessary.

A range of products has been targeted by the new rules, including grain, meat, milk, cooking oil, eggs and liquefied petroleum gas. Major producers, wholesalers and retailers will have to seek official approval before raising their prices and officials have the power to require enterprises to reduce prices.

It is easy to understand why such action has been taken. Food prices have long been a sensitive issue on the mainland, and inflation in the price of such basic necessities has been rampant in recent months. The higher prices are causing hardship for the poor and threatening social stability. There was an urgent need for the central government to be seen to be taking firm action.

But while there is a political need for Beijing to take the measures, whether they will prove effective is another matter. It is easy enough to impose controls - but far more difficult to successfully bring prices down.

The move also raises questions about the mainland's free-market reforms. Although major utilities are still under state control, the provision of food has long been liberalised. It is interesting to see a senior official from the National Development and Reform Commission quoted as saying that the measures are not intended to change the practice of enterprises determining the prices of their products or to interfere with their operation. This is, no doubt, the intention. But in practice, they will have an impact on both.

There is a danger that if the controls remain in place for too long they will further distort the market and store up even bigger problems in the future. From the perspective of farmers, whose incomes have failed to rise as fast as urban-dwellers, the measures to push down food prices could even be seen as the authorities sacrificing the rural sector again to appease the urban class.

In a truly free market, rising food prices should benefit farmers and prompt them to increase productivity and prices will drop as supply increases. Reining in prices by administrative means, alas, will now send the wrong signals to farmers, who might have been eager to boost production had there been no price controls. With supply remaining stagnant when it should be going up, it is wishful thinking to expect prices to come down.

The price rises on the mainland have contributed to inflation in Hong Kong. Concerns have been mounting this week about sharp increases in the prices of pork and beef in our city. Questions are being asked about our supply system for meat.

While there may be good reasons for further opening up the system, inflation is not a problem confined to Hong Kong or, indeed, to the mainland. It is a global trend caused by a variety of factors, including growing demand for meat and dairy products, the use of corn to make biofuel, and the market-distorting subsidies that developed countries give to their farmers.

The measures introduced on the mainland are an extreme response to a serious problem. But efforts must now be taken to boost long-term supply if the problem is to be tackled at its root.


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