By Editorial board
Published: 2008-01-21

Price Controls Will Not Solve Inflation
Cover editorial

Original article: [Chinese]

On January 16th, Chinese government started up temporary price control measures in order to prevent rapid price increases and maintain a "normal and stable" price system. It is obvious that the government attaches great importance to price rise situations, and this reflect its resolve to restrain inflation.

Over the past few months, any business that increased its prices was invariably criticized. Government departments, on the pretext of maintaining price stability, forced such businesses to halt their price increases. On the surface, such a measure does help to maintain the market price so that the civilians won’t pay much higher living cost. However, if deeply analyzed, those measures may have the opposite effect.

In the competitive market, as material costs continue to increase, they must either increase the sale price or else reduce output in order to cut down their losses. In response to the administrative measures, businesses will probably reduce their output, which is bound to lead to even more serious conflicts between supply and demand-- and further price rises. This is probably not what policy-makers want.

At present, high consumer prices have affected all social classes, but especially those in the low-income bracket, who are still anticipating even higher prices for the goods they rely on most. Under such circumstances, counter-inflation naturally becomes the government’s primary goal. But this goal shouldn’t be achieved by price controls, or by keeping companies from price-raising and transferring the costs to them.

It’s worth noticing that in a competitive market, companies have the right to adjust their product prices independently according to market performance and cost variation, as long as this adjustment is legal and in line with anti-trust laws. Even though soaring prices have affected the lives of the low-income group, it’s the government who should be responsible for relief and subsidies—not these firms.

In fact, higher costs doesn’t mean higher prices are necessarily the right solution. Different companies have different abilities to handle rising cost and risks, and to take the lead and raise prices could result in a slide in market share if their competitors don't follow suit. Though up-stream product prices were rising before the second half of 2007, finished consumables didn’t grow too much, proving that no one dared to make any hasty move to raise prices in such a competitive market.

What should be more focused on are monopolies and oligopolies, which are well-placed to manipulate the market and benefit directly from price increases. In China, they control public utilities closest linked to the lives of common Chinese—including electricity, oil, water and gas. Therefore, the government should effectively intervene with these enterprises’ prices. However, for other enterprises in the competitive market, the government should restrain itself from brashly interfering.

The National Development and Reform Commission claims that the temporary price intervention doesn’t mean price freezing. It says it will not change the nature of businesses' pricing autonomy. We believe that here, the state has indicated its boundaries, and we can see it as a standard based on principle. Excessive price interventions need only contradict these terms.

The objective of anti-inflation is to stabilize the prices. It is not as easy as controlling the prices. In face of sustained inflation pressure, many people will recall the control instruments under china’s planned economy. Some even suggest issue the purchase certificates again to make the instruments of planned economy and market economy mutually complementary. However, they neglect that china has become an emerging market economy state after 30 years’ reform and opening. It is ridiculous to control the inflation following the planned economy ways.

Inflation is always a monetary phenomenon. The decision-makers should research and judge it from the macroscopic angle, and focus on the instruments as interest rate and exchange rate. Besides monetary policies, financial policies should be concerned as the supplement, such as to grant subsidies to low-income families. This is believed to be more effective policy blending of anti-inflation.