[T.S.R:17350] China Raises The RED Flags, Asks Producers Not To Hike Price

Inflation Becomes The Bane In Asia

China Imposes Unofficial price control on Food, Edible Oil, Liquor & Daily Food Items

 

On Friday, China's National Development and Reform Commission and the Shanghai price authorities fined Unilever 2 million yuan (about $308,000) for sending notices to supermarkets and for talking to reporters in March about plans to raise prices on its products, including detergents.  The actions, according to the NDRC, "seriously distorted market order."

 

The world's second-largest consumer products company never actually increased prices, and it was not alone in its plans.  There was panic buying in Shanghai, Beijing, and other cities when state media announced that four companies dominating the detergent market—Procter & Gamble, Guangzhou Liby Enterprise Group, and Nice Group in addition to Unilever—were expected to hike prices by as much as 15%.

 

Unilever, alone among the four, was fined.  The Anglo-Dutch concern agreed to pay the stiff amount, the first large penalty imposed by Beijing's price regulator.  "As a responsible company we abide by laws and regulations in China," Unilever said in a statement.

 

The NDRC essentially admitted that it shifted the ground under Unilever when it stated that the punishment "was meted out to break ugly habits and build new rules."  Unilever's plight highlights the informal nature of Beijing's fight to contain consumer inflation, now running at 5.4% according to the most recent official figure.  The international press focuses on increases in interest rates and bank reserve ratios, but Chinese officials are relying on more direct measures to keep prices in check.

 

In addition to imposing huge fines, technocrats have been resorting to unusual tactics, such as buying vegetable stands in Beijing, eliminating road tolls for trucks carrying farm produce, and flooding markets with strawberries discharged from state reserves.  The NDRC is going after stores for deceptive advertising on prices, a tactic that has become widespread in China's inflationary environment. 

 

The central government is also affecting price levels by cracking down on speculation.  For instance, the State Council in November issued a 16-point circular on the topic and then upped the penalties on speculators in December.  In early January, the NDRC announced regulations aimed at price fixing, an indirect tactic to get at inflation.

 

The central government's other methods were more coercive.  Although Beijing in November, asked companies making prices adjustments to do so "promptly and moderately," it really meant they should not do so at all.

 

That month the Chinese central government warned it was willing to impose "temporary price controls" on "important daily necessities and production materials when necessary."  Yet it had already done so informally.  In November, for instance, Beijing asked the four largest producers of cooking oil to hold off price increases until March.  In December, it was the turn of flour producers to exercise voluntarily restraint.  And in a bid to keep a lid on electricity prices, the central government in December ordered coal miners to not raise asking prices in their annual contracts with power stations.

 

In early April, Beijing asked noodle makers to hold the line on prices.  At the end of that month, the NDRC actually prohibited producers of liquor, food, and daily items from hiking them.  The cooking oil companies thought that the informal price cap requested in November would be lifted, but the government renewed the request in early April.  In the middle of April, 24 domestic trade associations advised member businesses to show price restraint.

 

It does not matter whether the powerful government price regulator "asks" or "orders" producers.  As Unilever found out, Beijing always finds a way to enforce its will.

 

Or not.  China's producers, like those elsewhere, know how to defeat price controls in whatever form they are imposed.  Producers of cooking oil, for example, are shuttering production lines, holding inventory off supermarket shelves, or closing altogether.

 

Miners are getting around the ban on price increases by mixing in cheaper grades of coal in their shipments and even imposing illegal surcharges.  The price ban caused a coal shortage that in turn resulted in cuts in power generation last winter, even in the country's coal-mining areas.  The coal situation will aggravate looming power shortages.  And why will there be shortages this summer?  Price controls on electricity.

 

Beijing can get away with informal price controls if it deals with the underlying causes of inflation: an undervalued currency, which has kept export receipts artificially strong, and overly stimulative policies adopted late 2008.  So far, there is little indication that Premier Wen Jiabao is willing to take real steps to do so—in other words, to control the factors fueling growth of the money supply.  Because he won't control them, he will have to rely on fining Unilever as his second-best tactic. 

 

 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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