CHINA: Price freeze ordered to control inflation
Updated
The Chinese government has frozen the prices of some goods and services in an effort to limit rising inflation. Last month's inflation figure of 6.5 per cent was the highest in a decade, prompting the Central Bank to increase interest rates for the fifth time this year.
SNOWDON: It's not unusual for Beijing to send down a directive like the latest one to fix prices. It's mostly a warning for local governors to keep some control. But the centre has less control that it used to, except over key staples like water, power, some transport and oil products. It's a sign Beijing is worried.
BIN: Yes, definitely. I think this is a worry for the policymakers.
SNOWDON; Qu Hong Bin is the chief China economist with HSBC. A similar situation arose in 2004 and saw a price freeze ordered then. Food prices were the culprit as they are now. Prices for staple foods, especially pork have gone through the roof. But just two weeks ago, a senior official from the National Development Commission said shortages would be short term, and there was no serious inflation in China. The same commission this week says any unauthorised price rises are strictly forbidden. There's no relief in sight from importing pork, that's just not an option.
China is the world's largest producer of pork, accounting for 53 per cent.
Qu Hong Bin says wages are also rising quickly, but for the time being, are keeping pace with productivity. The risk is that could change. It's influenced the Central Bank's thinking. It's ordered five interest rate hikes so far this year.
BIN: It will be very different if we see a higher inflation expectations. People may asking for a wage increase. I think it's better with them to see some raise of the wage inflation.
SNOWDON: And is Beijing concerned to that that might led to some instability beyond the price increases that wage expectations that aren't met make people unhappy?
BIN: Yes, I think the Central Bank has made it specifically clear that the reason why they try to track the policy, is try to basically stabilise the consumers' inflation expectations.
SNOWDON: The price freeze might not have much effect. But even if the problem of high inflation turns out to be a short term one, it's throwing a spotlight on the major longer term issue confronting the Beijing leadership. It's happening during the lead up to the Communist Party's 17th Congress next month, where the income gap between rural and urban China will be the main focus. That's along of course with the filling of top party and government positions, for which manoeuvring is evident now.
Economist, Qu Hong Bin.
BIN: I think the business focus on the over the next 10 to 15 years, how China's going to address this kind of income gap as well as the rural issues, rather than just focus on the mere term economic issues such as kind of the inflation or the stock market overheating.
SNOWDON: The whole world at the moment seems to be distracted by the sub prime problems coming out of the US and the impact that's having throughout the global financial system. Any signs there that this is having an affect in China yet?
BIN: I think that's dependent on how the sub prime issues going to play out, if we are going to see high landing in the year's consumer spending. Yes, China will be affected. I think that's for sure.
Presenter: Karon Snowdon
Speakers: Qu Hong Bin, China Economist with HSBC
