The Wall Street Journal-20080117-China-s Food-Price Curbs Signal Increased Inflation Worry
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China's Food-Price Curbs Signal Increased Inflation Worry
BEIJING -- China's government moved to exert more control over increases in some food prices, signaling heightened concern over the high inflation that is threatening to erode the meager incomes of the nation's rural majority.
Under temporary measures announced yesterday, large producers of some food products -- including dairy, pork, mutton and eggs -- now must seek government approval before increasing prices. Wholesalers and retailers don't have to seek permission to raise prices, but must notify the government when the gains cross certain thresholds.
Separately, the central bank announced a measure intended to reduce bank lending as part of its continuing monetary tightening, which also is aimed partly at combating inflation.
China's government has voiced increasing worry in recent months about inflation, more severe bouts of which have in the past triggered instability in the country. Inflation this time has been mainly the result of rising food prices, especially those of cooking oils and meat -- which have pushed China's inflation rate to an 11-year high of 6.9% in November. China has longstanding price controls for gasoline and other energy products, and last week it reiterated it would hold those prices steady.
The government has been trying to encourage more production of food staples to reduce prices, but the results haven't been quick enough to ease widening social unease. The public named inflation as the top concern in a survey released this month by an official think tank.
The latest move, which takes effect immediately, "is an understandable reaction to political concerns about overall consumer- price index inflation," UBS economist Jonathan Anderson wrote in a report. Mr. Anderson said he expects headline inflation rates to decline in coming months as prices of meat and eggs level off.
Concern over inflation also has led Chinese authorities to adopt a "tight" monetary policy, which aims to restrict bank lending and corporate investment to prevent rising demand for raw materials and labor from pushing up prices further. In addition, authorities have allowed the currency, the yuan, to appreciate more rapidly in recent weeks, which helps counter inflation by making imports less expensive.
In its latest monetary-policy move, the central bank increased by half a percentage point the proportion of deposits that banks are required to hold in reserve. The move, the latest in a series of such increases, brings the so-called reserve-requirement ratio to 15% for most banks, reducing the amount of funds available for them to lend out. The central bank is also imposing strict quotas on new bank lending this year.
Economists tend to see price controls as, at best, a short-term solution and, at worst, a counterproductive way of combating inflation. "If strictly implemented, price controls could lead to shortages, forcing shoppers into highly visible queues. They could also prolong the problem by further discouraging producers from increasing output," said Mark Williams of Capital Economics in London.
China's government tried to reassure companies by emphasizing the limited scope of the controls and promising they would be removed quickly once inflation moderates.
