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China to Intervene to Curb Consumer Inflation

Reuters
Wednesday, 9 Jan 2008 | 5:12 AM ET

China's cabinet said on Wednesday that it would temporarily intervene in the market to curb price rises or basic necessities like food, underlining its concern over mounting inflationary pressures.

China is currently facing its worst consumer inflation in 11 years, driven largely by soaring food prices. Inflation has sometimes been a source of social unrest.

With immediate effect, producers of daily necessities that are above a certain size will have to get government approval before raising their prices, a regular meeting of the State

Council chaired by Premier Wen Jiabao concluded.

"We will step up supervision of the prices of key life necessities and in accordance with the Price Law, temporary price intervention measures will be adopted for now," the cabinet said in a summary of the meeting posted on the central government's Web site.

The cabinet did not specify which "basic necessities" would be affected by the rare step to intervene in the market, but the category of goods generally includes foodstuffs such as rice and edible oils. It did not say how long the measures would last.

Beijing controls the prices of diesel, gasoline and natural gas, as well as of utilities such as electricity and water, but almost all other consumer products are subject to market forces.

The companies affected by the order would have to register their wholesale and retail prices with the government, the notice added, saying that some firms had been hoarding goods, unreasonably jacking up prices or spreading rumours about price rises to encourage panic buying.

Beijing would strictly crack down on such practices and severely punish market manipulators, it said.

China's own production of grain, edible oil and industrial products was sufficient and could completely satisfy domestic demand. Hog production, which was hit last year by a disease outbreak, was steadily recovering, it said.

"But the prices of crude oil, grain and primary products on the global market are still rising, creating fairly high inflationary pressures on domestic prices," the notice said.

The cabinet made clear that it did not intend any immediate increases in the prices of energy products, including oil, power and natural gas, which are capped by the government.

Oil and natural gas prices are held well below international levels, insulating Chinese consumers from the worst impact of a recent rally to $100 per barrel -- despite the government's frantic efforts to curb demand growth.

The price controls have distorted domestic markets, because refiners are reluctant to sell at a loss unless under strong political pressure, and in October their retreat from domestic marketing caused the worst fuel crisis in four years.

The widespread diesel shortages and rationing eventually forced Beijing to raise prices 10 percent, though they still lag behind international levels, just a week after Wen had made a similar pledge to freeze prices until the end of the year.

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