Just as we start hearing serious rumors about government plans to streamline the government bureaucracy, merge various ministries and departments to create fewer “super-ministries”, and increase economic flexibility by reducing red-tape and government interference, the State Council announced “temporary price intervention measure” which will allow the authorities to prevent large scale producers from raising prices on what are called “daily necessities” (I have seen no definition of what this means, but assume it refers primarily to food and energy).In a related announcement, following a cabinet meeting yesterday, Premier Wen Jiaobao announced a freeze on prices of natural gas, electricity, water, transportation, education and health care prices.
The urge to reduce the complexity of government is not new. China is awash in red tape, and so many competing ministries and departments regulate different aspects of the economy that it is hard to get any coordination.According to an article today by Andrew Batson and Rick Carew of the Wall Street Journal, the government has already tried reducing complexity – the number of ministries declined from 45 in 1983, to 41 in 1988, to 29 in 1998 to 28 currently. The target is to get down to around 20 or fewer.Although this top-down approach to reform may seem aesthetically pleasing to the bureaucratic mind, I am not sure that reducing the number of ministries and increasing their power will make the economy or the bureaucracy more flexible if there isn’t a significant change in the incentive structure for powerful bureaucrats – which to me means real accountability and a well-functioning mechanism to enforce bureaucratic response to the needs of the sectors being managed.Increasing the power of these super-ministries may simply increase political infighting and factional struggles.We’ll see.
Meanwhile the announcement that the State Council can “‘temporarily” intervene in price hikes and is freezing certain utilities suggests that inflation is worrying them enough to force them to reverse direction in freeing up the economy.No one is certain how serious they are about these new measures – this might just be an attempt to show the people that they are truly concerned about inflation, which a recent survey has identified as the number one worry among the population at large, or it may be a very temporary measure to ensure a happy Spring Festival (this year it is on February 8, I think). By the way in its announcement the cabinet also said some firms were hoarding goods, unreasonably jacking up prices or spreading rumors about price rises. They assured us that they would crack down on such antisocial acts. That makes me think these announcements are at least as much about public perception than about real measures.Everything is so much better if we can identify the hooligans who have caused our troubles.But even if they are serious about implementing these new measures I am still very pessimistic about the chances of their working.
The success of government measures to restrain prices depends very much, as I have argued several times, on which model you use to explain inflation.If you believe that inflation is a temporary food-price phenomenon, one which will work itself out later this year as food production gets back on track, the greatest danger is the development of inflationary expectations which cause price rises to spread to other parts of the economy. In that case the various measures the government has taken – steps to cool the economy, to sell food reserves, and now to freeze prices – might actually work, although even that is open to argument.
If the problem is monetary, as I believe it is, then these measures are likely only to make things worse.Price freezes will translate, as they already did in the energy sector, into reduced production, consumer shortages and long lines – which may be even worse for the population at large because there will almost certainly be unequal treatment, and people find it much harder to bear difficulties if there is a perception that these difficulties are not evenly shared. Already the government is taking big losses on its fuel price subsidy and there are persistent rumors about fuel hoarding in expectations that prices will be forced up again in the near future. Needless to say this makes matters worse, not better.
Selling off grain reserves to depress prices is not likely to be much of a help either because it means, effectively, backdating inflation – lower prices today will be met by an increase in inflationary pressure as grain stocks are replenished in the future, and if in the meantime lower prices today reduce incentives to increase production, the net effect will be an overall increase in prices. Finally, restraining consumption simply means increasing the trade surplus and so increasing monetary expansion.
However you interpret these measures, the government is clearly very worried about inflation. December CPI numbers haven’t come out yet, but I expect we will get them in the next week or so.I would be very surprised if they are not high, but I think even then that December and January CPI numbers will understate the problem because of the immediate impact of measures aimed at keeping prices down for the Spring Festival, such as selling off grain reserves. Most CPI inflation estimates I hear are in the low 6% range, down from November’s 6.9% but still far outside the government’s comfort range.By the way the rumors are that producer prices will show in December continued rising from November’s already high 4.6%.
Wasn't a price-freeze attempted in mid-September, 2007? How does this differ from the first go-around?
As far as I can tell, the first go-around was independent of the state council and almost entirely symbolic given the NDRC's increase in the pump-price of gas only a few weeks later.
By Ken - 1/9/2008 9:33 PM
There is a real conflict between the desire to open the economy and deregulate prices and the fear of rising inflationary expectations. This policy back-and-forth indicates how anxious the debate has become.
By Michael Pettis - 1/10/2008 2:53 PM
China forces the inflation down. What doe's it means?
- ""Prices of gasoline, natural gas and electricity shall not be adjusted in the near future, and charges for gas, water, heating and public transport in cities shall not be raised," a statement released from the meeting said. "
- ""Fees for medical treatment shall be stabilized. Prices of major fertilizers, such as carbamide and phosphate fertilizer, shall be kept steady too and can only be raised really because of cost increase and after being approved by the regulator," it said. "
- ""Companies who collude in jacking up prices, stoke fears for price hikes by hoarding or spreading phony information, or raise prices before they are approved and registered officially will face stern penalties," the statement said."
- ""No malpractice that violates the laws and regulations and disturbs the market order will escape punishment," the release said. "
- ""The Chinese government will strive to bring the price hikes under control ... by expanding [farm] production for steady supply," said Gao Hongbin, vice minister of agriculture, at a press conference. "
- As long as the trade balance with US stays on the actual high level, there is no reason for US, to stabilise the USD. (further on with Paulsons famously called "strong dollar politics").
- As long as US does not stabilise the Dollar, the Chinese gov. actions will show only little effect and are only temporary.
- The costs of these inflation-actions will come later; but at the moment it seems, that the Chinese has enough reserves, to handel such details.
globumedes
By globumedes - 1/10/2008 5:52 PM
Globumedes. I am not sure how you meant it but reserves are not very useful in fighting inflation or paying for the costs (which are primarily political/social. Whther inflation is caused by one-off food price hikes or by excessive monetary expansion, fixing the problem means addressing domestic issues. The only relationship between reserves and inflation is that rising reserves means the PBoC is monetizing fx inflows.
By Michael Pettis - 1/11/2008 1:50 PM
Hallo Michael Prettis
I have the following picture:
I think, the China-inflation is wanted by US-gov. The US wants to bring China in high inflation area; because that seems to be the only way, to bring the Chinese nearer to the idee, that they have to appriciate the CNY.
All solutions for the US-recession would be only temporary, except they will find a way, how to reduce the trade deficit.
So the US try to do two things: - bring USD/CNY down (20% or 50% or...??) - bring production back to US (US needs more products to sell to China/or to import less from China)
If that doesn't work, US will go further down.
(Besides the economic perspectives, we should not forge the power-politics: if US wants to be the superpower and world hegemon for 21century, it has to do something. The circumstances to do so, will become harder every coming year; the timeframe: max.15y.)
The Chinese perspective: Things look good with the huge current account surplus. This gives them enough possibilities to go on developping their country and to hold the burocratic-elite in power.
I think, the Chinese see, that the ongoing surpluses are unsustainable. But to correct this, they will find themselves in a dilemma:
- to appreciate the CNY, will cost exports (money and production can move quickly to those countries that will stay peged to the USD (Vietnam,..); so it will cost workeplaces-->layoffs-->angry Chinesepeople on the streets
- no or only slow appreciation will bring the inflation high and higher with devastating effects. (at the end, the people will also be on the streets)
So what to do for China? Till now, I think, the gov. has done a good job (the gov. is still there). I think they will go on, to do the same as they did before; because they have no alternatives:
- if pressure comes from outside (US, EU) -and there will be a lot more- they will appreciate the currency as much as is the pressure
- the mounting inflation will be fought with the instruments you mentioned in your blog.
Now your remark: "..reserves are not very useful in fighting inflation or paying for the costs"
I think, that US is in recession and EU will soon go down. The effects on China will be huge, if the recession goes longer than three quarters.
- With the reserves, they have the possibility to run big investment-programmes for a short time (1or 2 y) without falling in the position of taking money from outside (IMF, bonds,.).
- US-recession and invalide EU will bring down the inflation in China (commodity, energie, food)
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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December, 2007
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