Inflated concerns

The wintry weather was bad enough, but the Chinese government had another element – spiralling inflation – to contend with in the run-up to  the Chinese New Year. Holiday spending was likely to drive up demand, pushing up already high food prices. The snow storms, meanwhile, caused transportation delays and supply shortages.

On January 16, the National Development and Reform Commission (NDRC) stepped in, announcing that it would introduce direct price controls on major food items, including eggs, dairy products and pork. The NDRC’s move came a week after Premier Wen Jiabao announced a price-freeze on oil products, natural gas and electricity.

For many analysts, the government’s announcements were initially cause for much concern.

“Price controls are rarely a good idea, and we don’t believe this instance is any different,” said Jonathan Anderson, global emerging markets economist at UBS, an investment bank.

However, Anderson and others remain optimistic that the latest controls are no more than a short-term effort to improve consumer sentiment at the height of a price cycle.

Pork prices, which rose about 60% in 2007 and contributed substantially to a surging consumer price index (CPI), are illustrative. In 2004, Chinese farmers rushed to raise pigs, driven by soaring prices. The glut that followed suppressed prices to the point that by early 2006 money was being lost on each animal sold. With farmers thus discouraged from raising pigs, pork shortages were a predictable result. The added problem of blue ear disease, an often fatal cattle condition that swept through China in 2007, put further strains on pork supplies.

But pork prices were beginning to stabilize even before the latest controls were introduced, according to David Tsoi, spokesman for People’s Food, a major supplier of meat products in China. Prices were relatively flat in the last quarter of 2007, rising at levels that are proportionate to China’s developing economy.

“Relative to global prices, China’s prices are still very cheap, so now it’s just catching up,” said Tsoi. “With economic growth in double digits every year for the last 10 years, I think [this price rise] should have happened much earlier.”

Scarecrow tactics
Tsoi’s view that the controls are a temporary measure aimed at curbing profiteering and other “unscrupulous business practices,” was backed up by a recent report by Citi Investment Research. The report, which calls the controls a “scarecrow,” notes that retailers have not encountered government interference in retail prices, despite reports that controls would be enforced from early January.

How Beijing would go about enforcing the rules also remains unclear; Anderson said no details have been forthcoming regarding implementation.

As outlined by the NDRC, price controls require large retailers and wholesalers to seek government approval for any individual price hikes of over 4%. Approval would also be required for cumulative increases of over 6% in a 10-day period and incremental increases of more than 10% over 30 days. Price hikes within these boundaries would require no government involvement.

The lack of detail suggests that Beijing is adopting a more subtle approach – tinkering with consumer psychology – than outright price controls. Coming in the weeks before the Chinese New Year holiday, a period of high demand and corresponding price increases, the announcement was more than just a warning that attempts to gouge consumers would not be tolerated.

In a statement on its website, the NDRC said a primary goal was to “stabilize society’s psychological expectations” – specifically, expectations of inflation.

Despite the threat of inflation, Chinese shoppers don’t seem perturbed. Citi reported that on New Year’s Day 2008, retail spending increased by more than 20% year-on-year in Shanghai, Beijing, Xi’an and Shenzhen. Large- and medium-sized retailers in Shanghai reported a 42% jump in sales compared to the same holiday period last year.

Even if CPI inflation, which reached 4.8% in 2007, is higher than the authorities would like, there is little danger of a wider economic crisis as a result. Anderson notes that, in China’s vast economy, CPI is only part of the picture.

Furthermore, concerns that the government might maintain and enforce price controls throughout 2008 have diminished as it continues to avoid direct intervention. A research report from the brokerage CLSA, for example, was optimistic that China would gradually raise energy prices – despite the price freeze announced by Wen – to promote conservation as the CPI decreases this year.

Snow joke

As for China’s winter weather, which stoked fears of destroyed crops and furthur food price increases, there may be a silver lining.

“When the snow melts, the soil tends to be quite good,” said People’s Food’s Tsoi. “So unless you have flooding this year, one could expect that a good snow means a good harvest.”

Good news for China’s farmers, consumers and government alike.