Tue, May 11, 2004 page12

• China to impose price controls

  TACKLING INFLATION Provincial governments have been told to limit price increases when the CPI breaches limits set by Beijing but some question whether administrative fiats will work effectively

  • AFP AND BLOOMBERG
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  In a return to the days of command planning, China yesterday ordered provincial governments to cap price increases in a bid to rein in inflationary pressures and slow down its runaway economy.

  Provincial governments will be barred from raising any prices for three months when local consumer prices rise more than 1 percent from the previous month or by more than 4 percent from a year earlier for three months in a row, the State Development and Reform Commission (SDRC) said on its Web site.

  In areas where the Consumer Price Index (CPI) does not breach the SDRC's ceiling, authorities have been told to control the timing of any price increases and make sure there are no sudden and sharp fluctuations.

  

  Chinese workers push bicycles past piles of coal at a factory in Beijing yesterday. The central government has told provincial authorities they must halt utility price rises if local inflation gets out of hand, state-run media reported yesterday amid new efforts to cool down the economy.

  PHOTO: REUTERS

  Those who violate the mandate will be punished, the commission said.

  China's leaders are resorting to central planning edicts to cool growth after inflation accelerated to 3 percent in March amid a 43 percent first-quarter jump in fixed-asset investment. The effectiveness of the latest measures may be limited because the government has less control over prices than in the past, analysts including Li Mingliang, said.

  "The prices of 90 percent of commodities are decided by the market, rather than the government," said Li, of Haitong Securities Co in Shanghai.

  Still, local governments "don't cooperate well with the nation's macroeconomic control and are inclined to raise prices for short-term profit," Li said.

  Premier Wen Jiabao (溫加寶) last week said the government is taking "forceful" steps to slow the economy.

  The State Council, or Cabinet, last month increased curbs on lending for new projects in industries that are expanding too rapidly, including steel, real estate and aluminum, and halted the building of a US$1.3 billion steel mill. China's banking regulator also ordered banks to stop lending for projects in some industries.

  China's reliance on administrative fiat to engineer a slowdown echoes previous attempts to rein in periods of excessive growth under former premiers Zhu Rongji (朱鎔基) and Li Peng (李鵬).

  Under Zhu, then vice premier in charge of economic policy and central bank governor, the economy slowed to 7.1 percent growth in 1999 form 12.8 percent in 1994. Under Li, growth dropped to 3.8 percent in 1990 from 11.3 percent in 1988.

  The price restrictions are mainly aimed at service areas of the economy, such as suppliers of water, electricity, gas and healthcare -- segments where higher charges would hurt lower income groups.

  "It reflects the concern of policy makers about inflation, basically in the low income segments of the population, where increases could generate social instability," said Deutsche Bank economist Ma Jun.

  China's roaring economy has showed few signs of braking, expanding 9.7 percent last quarter after 9.9 percent in the three months to December.

  To blame is soaring fixed-asset investment, which rose 43 percent in the first quarter, fuelling inflationary pressures in sectors such steel and construction.

  Cooling measures aimed at these overheated sectors have so far failed to temper the world's sixth largest economy, which surged 9.1 percent last year, and has led to mounting fears of an investment bubble as prices march higher.

  Central government leaders, including planning commission head Ma Kai (馬凱), have blamed local authorities for fueling an investment boom that's choked the transportation system, led to shortages of electricity and driven up prices of commodities.

  The CPI is close the six and a half-year high of 3.2 percent reached in January. Inflation may approach 5 percent in May, June and July because the SARS epidemic depressed prices in the comparable months last year, a senior central bank official said last month.
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