Reaping fruit of Beijing's war on runaway prices

PUBLISHED : Monday, 03 January, 2011, 12:00am
UPDATED : Monday, 03 January, 2011, 12:00am

Fruitseller Li Xia knows exactly how the pricing system works. The produce she calls 'ordinary fruit' - imported grapes, cherries and lemons - she marks up according to how other vendors set their prices.

Then there are the more popular items, such as strawberries shipped from the southern provinces, whose prices reflect government policy.

'They're cheaper than a couple of weeks ago by 4 yuan (HK$4.70) per kilo. It's the festival season now and kids love them, so the government is moving in larger shipments.'

This is partly how mainland authorities are interfering in the retail market nowadays to assuage consumers during the country's worst inflation in more than two years.

Administrative control measures are being used, along with moves to increase supply of major consumer items, to rein in the once galloping food prices to offset economists' fears that overall inflation will get worse in the first quarter of the year.

The measures would buy time before Beijing's new monetary policies begin to work to drain some liquidity (money that flows around, taking quick profit) from society, Ba Shusong , an economist with the State Council's Development Research Centre, said.

Beijing is still depending on these measures for price stabilisation until its overall policy package for 2011 is approved by the National People's Congress in March.

The reason China can keep its price rises below 10 per cent year on year while other emerging market economies are facing double-digit inflation is mainly because it has two weapons.

One is its state procurement and reserve system for key agricultural products and, by extension, selective management of staple supplies in every category - such as strawberries during the festival season and Chinese cabbage in early winter.

Dang Guoying , an economist with the Chinese Academy of Social Sciences familiar with rural development, said the state reserve system blocked speculators' efforts to manipulate the market and jack up prices for their own gain.

The other weapon, a legacy of the planned economy of the past, is the government control of utilities and certain key resources and services - such as all major transport.

As part of its effort to stabilise food prices, the central government has banned charging road tolls on vehicles carrying farm produce to the cities.

One way the state uses its reserves to harness inflation is to offer the commodities for sale in wholesale markets, at times in large quantities at a discount price, with the state absorbing all the losses.

Local authorities in more and more cities have also learned the trick by selling certain goods, such as the vegetables purchased from farmers, directly in the retail market despite complaints from small vendors.

According to the National Development and Reform Commission, central government agencies had already 'discharged into the market' more than 25 million tonnes of grain and edible oil in their previous state reserves since early October through large regional wholesale centres in Henan and Anhui .

The phrase 'discharged into the market' implies that, rather than regular selling, it is not intended to make a profit.

Officials were quoted by the Guangzhou-based Time Weekly as saying that still more state reserves were to be released in the next few weeks, consisting of 8 million tonnes of grain and edible oil.

As cheaper supplies begin to enter the market, price rises can moderate, especially when official decrees are being circulated at the same time that impose stiff penalties on speculative hoarding and reselling.

In late November, a 16-point circular was issued by the State Council, the nation's cabinet, to crack down on food speculation, with details listed on the NDRC website.

A joint task force was set up by the NDRC, with officials from 20 central government agencies, to police the general price levels and supplies of key commodities in 18 provincial-level entities. On December 10, the State Council raised the maximum penalty on speculators from 1 million yuan per incidence to 5 million yuan.

Nonetheless, the administrative measures, though necessary, could not be the long-term solution, Deng Yuwen, a Central Party School economist, argued recently.

Many important price reforms are needed, especially on key production materials, before the economy can become more efficient and less vulnerable to inflation. For example, energy expert Professor Lin Boqiang argued that price controls on energy resources were detrimental because they encouraged waste and pollution.

And a small, gradual appreciation in the yuan can also help China better resist inflationary pressure, according to a recent article in the Financial News written by Sheng Songcheng, who heads the statistics department of the People's Bank of China.

Growing penalty

The State Council raised the maximum penalty for food price speculators from 1 million yuan per incidence to: 5m yuan