statement from the State Council on Wednesday pledging to use administrative measures to tame rising prices of food and energy, and to cushion the poor with higher welfare payouts, appeared mainly to reflect government concerns that inflation could trigger social unrest.
Accelerating food prices--the biggest single component of China's inflation, now running well above the government's target of 3% for the year--are hurting China's neediest households, and their plight could get worse as the country heads into what is forecast to be an unusually cold winter that threatens to disrupt transport and bring new fuel shortages.
Some economists interpreted the statement as a signal that the government was more concerned about the political fallout of inflation than with economic overheating in general. The last time Beijing resorted to price controls was when inflation spiked in 2008.
Still, the measures feed into anxieties among investors that China will roll out increasingly stringent anti-inflation measures that will put a sudden brake on its growth.
The State Council said the government would intervene 'when necessary' to impose temporary controls on the prices of 'important daily necessities and factors of production.' It promised to crack down on speculators who have been driving up the price of agricultural commodities. In addition, it outlined moves to boost the supply of diesel fuel, used for farm vehicles, and to control energy prices.
Talk of price controls has worried investors for several days and has helped to send China's stock markets swooning. The benchmark Shanghai Composite Index has lost 10% in the past four trading days, including a 2% drop Wednesday.
That China feels it is necessary to use price controls has signaled that policymakers have been too reactive to the inflation threat, instead of getting ahead of the problem, said Li-Gang Liu, head of China economics for ANZ Bank in Hong Kong.
'If they use too harsh monetary policy to tighten credit supply in the remainder of the year, it's quite likely we will see some sort of hard landing going forward,' Liu said.
Supermarkets and restaurants across China are passing on rising agricultural prices to their customers. McDonald's Corp. (MCD) on Wednesday blamed growing costs for a decision to increase prices at its more than 1,100 China outlets by up to 1 yuan, or 15 U.S. cents, on a range of items, including chicken McNuggets, pies, and ice cream.
A Chinese hard-landing scenario has helped to roil international markets at a time when investors are consumed with European debt problems and rising bond yields in the U.S. China is seen by investors as having played a major role in reflating the global economy after the collapse of Lehman Brothers Holdings Inc. and a bruising inflation fight could mean the world's fastest-growing large economy could become preoccupied.
Expectations that China will curb its voracious appetite for commodities has sent prices lower for everything from crude oil to soybeans.
Since Nov. 11, when China published a surprisingly high 4.4% October consumer-price reading, Nymex crude oil for December delivery has fallen 7%. Soybean prices traded at the Chicago Board of Trade have fallen 9%. On the Shanghai Futures Exchange, copper and zinc both fell 5% Wednesday, triggering circuit breakers that limit single-day moves.
The urgency for Chinese officials to address rising inflation may have been increased by the U.S. Federal Reserve's plan to resume buying government bonds in an attempt to drive interest rates lower. In recent weeks, numerous Chinese officials have said the Fed's policy threatens to spur inflation and capital inflows to emerging economies.
Economists point out that the Fed's looser monetary policy should be inflationary for China only if it tries to keep its currency effectively pegged to the U.S. dollar. So the increased worries about inflation could be another incentive for China to continue, or perhaps to accelerate, the recent appreciation of its currency, which has been rising about 1% a month against the U.S. dollar since September.
While a stronger yuan, or renminbi as its also known, puts pressure on China's exporters, it also lowers the price of imports, especially raw materials that are generally priced in dollars.
'China has to allow the renminbi to appreciate faster to dampen the effect of imported inflation,' said Liu of ANZ.
Price controls are arguably the sixth tool Chinese policy makers have unveiled this year to fight inflation. The tools include increases in bank-reserve requirements, lending curbs against property, tightened capital controls, an interest-rate increase in October, and modest currency appreciation.
Economists worry that price controls can distort markets and exacerbate problems over the long run. Forcing farmers to accept lower prices for their goods takes away the incentive to plant more or invest in more-productive growing methods.
'These measures buy time, but the risk is they do more harm than good,' said Robert Subbaraman, economist for Nomura in Hong Kong.
Chinese economists mostly believe upward inflation pressures have begun easing, though inflation expectations remain high, adding to pressure on Beijing to act. 'We should fully realize the importance and urgency of stabilizing market prices and take strong measures timely,' the cabinet's meeting chaired by Premier Wen Jiabao said, according to a statement posted on the government's website.
The measures combine both 'steps to cope with short-term emergencies' and 'a mechanism that aims for long-term effect,' the statement said.
The statement said the government will gradually increase payments from pension funds and unemployment insurance and raise minimum wages, as part of measures to help low-income families cope with price rises.
It calls for an increase in oil-product supplies amid a severe shortage of diesel fuel caused by the government's energy-saving efforts. Local governments in some areas have imposed electricity rationing to meet centrally imposed energy-efficiency targets, prompting some industrial users to switch to diesel generators.
The government has planned to gradually raise natural-gas prices to encourage more efficient use, but the statement indicated this may now have to be delayed by stressing the need to 'manage well the timing, pace, and magnitude of adjustments on government-administrated prices.'
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