[Marxism] China battles rising prices, snowstorms

[Walter Lippmann]

csmonitor.com - The Christian Science Monitor Online
from the February 01, 2008 edition - 
http://www.csmonitor.com/2008/0201/p01s01-woap.html

China battles rising prices, snowstorms

With monthly inflation at 6.5 percent, Beijing applies 
its first price controls in 15 years.

By Peter Ford | Staff writer of The Christian Science Monitor
 
Beijing


The snowstorms currently sweeping China have wreaked havoc with
millions of people's New Year travel plans and caused $3 billion
worth of losses, including thousands of acres of winter crops.

But the harsh weather is revealing an even deeper problem for
Beijing: the difficulty of trying to manage a mixed economy, which is
about 30 percent state-owned and 70 percent in private hands.

"The Chinese economy is not a real market economy, nor a real command
economy, so government controls are not very effective," says Xu
Guangjian, an economist at People's University in Beijing.

Food and power shortages affecting tens of millions of people, and
tens of thousands of enterprises, have drawn attention to just how
difficult a task the Chinese government faces, even when the sun is
shining.

The weather and the timing have compounded underlying economic
problems, says Stephen Green, senior economist with Standard
Chartered Bank in Shanghai.

"This is a perfect storm," he says.

The past month has seen several indications of how easily an economy
as huge and complex as China's can slip out of the central
government's control.

Two weeks ago, for the first time in 15 years, the authorities
imposed price controls on a number of basic food items in a bid to
stem inflation, which reached an 11 year high of 6.9 percent in
November.

Last week, the government's Statistics Bureau announced that the
Chinese economy had grown by 11.4 percent in 2007 - the fastest rate
in 13 years and a good deal faster than planners, worried by the
dangers of an overheated economy, had hoped.

On Jan. 28, as power stations ran short of fuel, the National
Development and Reform Council, China's top economic policy body,
ordered provincial governments to share coal supplies, as a sign that
local officials were putting their own interests ahead of national
needs.

Officials insist that the new food price controls are simply an
effort to overcome malfunctions in the market, not a retreat to
socialist economic planning diktats.

Nor is China the only Asian country taking action in the face of
rising food prices: Malaysia rationed cooking oil last month, while
Indonesia is subsidizing edible oil refineries to keep retail prices
down. Beijing's moves include curbing exports of wheat, corn, and
rice powder in an effort to boost domestic supply and dampen price
increases.

But with food taking up nearly half of a poor Chinese citizen's
weekly budget, and the price of pork, a local staple, rising by more
than 50 percent last year, Beijing is especially worried about the
danger of social unrest.

A survey released in January by the Chinese Academy of Social
Sciences (CASS) found that inflation is the No. 1 public concern
among Chinese citizens, and the government has made the fight against
rising food prices its top priority.

Administrative price controls, however, are hard to implement now
that almost all food production, distribution, and sales are in
private hands, economists say. If farmers or shopkeepers are not
allowed to raise their prices in line with their costs, they will be
tempted to hold supplies back.

"In some places there will be shortages," predicts Professor Xu. "It
is a predictable result."

As a short-term measure to calm expectations, the price controls may
have some impact, suggests Wang Cheng, an economist with CASS. "They
will work for a period of time, but not so long," he cautions.

"Trying to use price controls to contain inflation is probably not
wise ... and will be very difficult to impose," says Andy Xie, an
independent economic analyst.

The government's plans have not been helped by the severe weather,
which is expected to push food prices higher. "The impact of the snow
disaster in southern China on winter crop production is extremely
serious," Chen Xiwen, deputy head of the ruling Communist party's
leading financial team, told reporters on Jan. 31.

He predicted that January's inflation rate would be around 6.5
percent, roughly the same as December's figure. US inflation rose .3
percent in December, by comparison.

The power outages that have made the cold even harder to bear in much
of central and southern China have also highlighted the complexities
of running an economy that is partly state-owned and partly private.

Nowhere is the confusion greater than in the energy sector, which is
"stranded between the plan and the market" in the words of Philip
Andrews-Speed, director of the Centre for Energy Policy at Dundee
University in Scotland.

Power stations are constrained by a freeze that the government has
declared on electricity prices, which has made them increasingly
unprofitable as coal prices have risen.

Though weather-related transport difficulties have clearly
contributed much to current coal shortages, market distortions seem
also to be playing a role: Some power station managers have
reportedly been selling their coal stocks, rather than burning them
to generate electricity, in order to make more money.

The government has plans to liberalize the energy sector, which would
mean lifting the freeze on electricity and gasoline prices, but while
inflation is a threat, "this is not the right time to pursue such
reforms" says Mr. Wang.

"The government could raise energy prices, but it fears the reaction
on the street," adds Mr. Green.

Meanwhile, China's booming gross domestic product growth worries
officials whose efforts to rein it in have not succeeded. Repeated
government moves to limit credit - such as higher interest rates and
directives to banks to curb their lending - have not dampened the
runaway growth, which many economists say is fueling the inflationary
spiral.

The international economic downturn could help slow China's economic
growth in the coming months, given its dependence on exports to
troubled economies such as America's. But Beijing acknowledges that
it has little influence over the pace of a global slowdown. "There
are uncertainties in international circumstances and the economic
environment, and there are new difficulties and contradictions in the
domestic economy," Prime Minister Wen Jiabao told his cabinet last
week, in somber comments published on Jan. 28.

"We fear that 2008 will be a most difficult year for the economy," he
added.