Worried about inflation, China strikes hard at Unilever

China fined Unilever more than $300,000 after the Anglo-Dutch firm said it might raise prices on toiletries and other products. The blunt response was designed to 'break ugly habits,' that distorted market prices, officials stated.

The Chinese government is getting tough in its fight to tame inflation, fining a foreign company more than $300,000 just for talking about its plans to raise prices.

Such administrative measures may be eye-catching, economic analysts say, but they are unlikely to have much impact because they do not attack the real root of inflation, now at its highest rate for nearly three years.

“This is like sticking your finger in a dike” to stop a massive leak, says Arthur Kroeber, head of the Dragonomics economic consultancy in Beijing. “There is no way it can be effective.”

The Anglo-Dutch company Unilever was fined because its spokesman announced in March that rising costs of materials might lead the firm to increase the prices of its toiletries and other products by as much as 15 percent.

The news sparked a run on Unilever products and hoarding that “disrupted market prices,” said the National Development and Reform Commission, China’s top economic planning agency, on its website. “Severe punishment was meted out this time to break ugly habits and build new rules,” the NDRC said, warning other firms to “absorb the lesson.”

Unilever, which recently said it hoped to boost its sales of $2 billion a year in China fivefold by 2020, accepted its costly punishment. “As a company with a long-term commitment to China, we continue to be sensitive to the local environment,” the company said in a statement.

Taming social discontent

Consumer prices rose by 5.4 percent in March, the fastest pace for nearly three years. The government is afraid of rising social discontent over high prices, especially for food, and it has made the battle against inflation its top economic priority this year.

China's Central Bank said last week that “stabilizing prices and managing inflation expectations are critical” to government policy. Last February, Premier Wen Jiabao said during an online chat session with the public that he would not allow prices to rise unchecked and that “excessive increases in consumer prices would not only affect people's lives but also even undermine social stability.”

Chinese and foreign economists blame China’s rising inflation mainly on the rapid increase in money supply over the past two years, a result of the massive stimulus plan the government put into place to carry the country through the financial and economic crisis.

The Central Bank has raised interest rates four times since last October and also obliged banks to hold more of their capital in reserve, in a bid to stem over-generous lending. Its move against Unilever, however, suggests that the government believes blunter measures are needed to get a grip on inflation.

The Chinese authorities have been asking private companies to exercise price restraint for several months, leaning on the biggest cooking oil producers, for example, to hold the line last November. Three weeks ago the All China Federation of Industry and Commerce urged member firms to keep prices steady.

Unilever’s punishment, however, was the loudest and most public message the government has yet sent using the Price Law, which forbids “the spreading of rumors about price rises.”

In practice, though, the government cannot slap the wrists of every company in China that raises its prices as its costs go up, nor can it keep firms from getting around the regulations by – for example – reducing the quantity of soap powder they put in a packet while keeping the price the same.