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Curbing price rises not easy solution

MY cousin, a 38-year-old senior manager in a multinational clothing company, recently told me that he has started to stockpile goods at home.

"I'm now buying more daily necessities than I need," he said. "Even if prices don't go up, I think the quality of things will decline in the future."

That helps to explain, perhaps, why women and men, old and young have engaged in bouts of panic buying of salt, cooking oil, detergent and other daily necessities in the past month.

Chinese consumers are finding themselves in a quandary trying to judge whether it's better to buy today as a hedge against higher prices or trust government promises that food inflation and housing costs will be reined in.

The National Development and Reform Commission, China's top planning agency, hasn't helped them come to an easy decision. Since the end of March, the NDRC has adopted some measures that send mixed signals.

On the one hand, it was forced by skyrocketing crude prices to raise the prices of gasoline and other petroleum-based products to a record high in early April. That was followed by an increase in electricity prices, largely reflecting the higher costs of coal.

On the other hand, the Chinese government is trying to jawbone companies into keeping a lid on their prices.

Several manufacturers of personal-care products, such as Unilever, Zhejiang-based Nice and Guangzhou-based Liby, said in early April that they were suspending plans to raise prices under government pressure.

This month, 24 industry associations under the All-China Federation of Industry and Commerce - whose businesses cover the food, beverages, milk, home appliances, sugar, alcohol, grains, meat and vegetables industries - agreed to voluntary price controls.

The associations jointly published a document asking both state-owned and private companies not to raise prices.

But so many profit-oriented companies in China taking a pro-consumer stance is good reason for skepticism.

So I decided to do a little investigation into their claims. I started tracking the prices of about 40 personal care products in a supermarket two weeks ago.

This was by no means a scientific undertaking. Nor was I trying to compile any incriminating information about any company or supermarket. I was just adopting the behavior of an ordinary consumer.

Here's what I found. Prices of eight items, including laundry detergents and skin moisturizers, jumped from 2 percent to 20 percent.

The prices of three of the items I was tracking dropped between 10 percent and 25 percent as they were on sale.

The prices of the 29 remaining products were unchanged. I should also note that the shelf for laundry detergents was always half empty. I can only presume there has been some household hoarding going on, in anticipation that prices will rise further.

I have a sinking feeling that prices for other products, such as milk and food, will eventually rise when administrative price-control measures ease or end in vain.

The bottom of the chain

Though I am somewhat skeptical when companies moan that rising costs will be the death of them if product prices aren't raised, I don't feel very hopeful that administrative measures can address the problem.

The consequences are many.

Recently I read a story in 21st Century Business Herald about a farmer in a village near Jinan City in Shandong Province. He committed suicide after losing a lot of money growing vegetables.

The report said that cabbage was sold at 1.6 yuan (25 US cents) a kilo in a wholesale market in Beijing, while the farmers received only 0.2 yuan a kilo from middlemen at the farm gate.

The news aroused a lot of anger among netizens, who railed that "it's always the weakest who have to bear the sacrifice of low prices."

It does seem true that farmers and other primary producers lose whether prices of their products rise or fall. It's always those at the top of the supply chain who are the last to be hurt.

From there I started thinking about coal miners, drivers and other "little people" who make their money at the bottom of the chain. Price controls will hit them hard.

It seems that the government has yet to hit upon a fair and balanced plan that spreads the pain more evenly.

If companies can't correlate prices to market demand, they aren't well-equipped to judge just how much production they need. Investors uncertain about production will be reluctant to invest. The result could be an irrational flow of capital.

If companies find they are losing money by producing products, they logically cut production or else store their goods until prices rise. That can result in shortages of supplies, which force consumers to pay even higher prices if they seek the goods on the black market.

The situation may ring a bell for older people who lived through the era of a centrally-planned economy that was the norm in China before 1978.

If companies want to make profits while their product prices are curbed, they simply use cheaper materials and make shoddier products. That doesn't bode well for companies that have taken decades to shed the image of second-rate goods makers. In the case of the food industry, already tainted by scandals over cutting corners, the effect could ruin reputations if not public health.

"The best way to ensure low prices is to offer subsidies," said Zhang Jingdong, an analyst at Dongxing Securities. "That's what governments in other countries usually do."

Publicity stunt

The associations' pledge to keep a lid on prices, made under government pressure, has no enforcement provisions. That means companies may do whatever they wish without fear of reprisals. It makes the pledge look more like a publicity stunt than solidarity on the price front.

The measures don't address one root source of inflation as economists see it: excess money supply. Nor do they carry much weight when it's supply, demand and production costs that in the end determine prices.

Administrative measures to control prices at best can have only temporary effects, and some of them may actually be harmful to industries in the end.

This isn't the first time that industry associations have tried to present a united front on price controls.

In 1998, when China was struggling with massive oversupply and deflation, companies were madly cutting prices to boost sales. That, in turn, eroded both profits and corporate taxes flowing into government coffers.

At that time, in order to prevent price wars and increase taxes, the government required members of the associations to adhere to "self-discipline in prices." Offending companies were to be disciplined by their associations.

But the effort to control prices proved to be a fiasco. Companies prevented from raising prices fell behind on their loans. Consumers lost the advantage of product competitiveness. And there were many loopholes that unified action quickly splintered.

In 1999, when China opened the faucet for investment flows and new loans, the price wars ebbed and prices resumed their climb.

Today we find ourselves on the reverse side of the 1998 situation. Monetary policy remains fairly loose, despite some government efforts to curtail lending, and prices are surging. Complicating the situation, many commodity prices in the world are now near record highs, forcing up the cost of basic raw materials in all industries.

The People's Bank of China, the central bank, is certainly using more draconian measures to tighten liquidity, but price controls are a different kettle of fish.

The fact is, there is no sense of security for consumers in China. You never know what additives will be added to your next steamed bun to try to boost sales. You never know how much more you might have to pay if you wait 10 more days to buy something.

I could only be left marveling at a recent newspaper story about a young Japanese guy who felt ashamed when his mother bought home two rolls of toilet paper instead of one. He returned one roll to the store, telling the shopkeeper: "Other people may need it."

I believe there are certain elements in our culture that encourage people to be rational, calm and benevolent, but those positive traits are at risk if people start to feel very uneasy about their future.

Such is life.


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