China battles rising prices, snowstorms

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

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.