China Launches Price Freeze

Do you remember “Whip Inflation Now,” Gerald Forf’s program to reduce inflation by exhorting consumers to spend less? WIN buttons, part of a public awareness campaign, quickly came to symbolize the cluelessness of the Ford Administration.

The Chinese are about to learn Ford’s lesson the hard way. Rampaging domestic inflation has led the government to impose a price freeze on goods where the government determines the price. Sounds like a step back to central planning.

Oddly, this story from the Financial Times does not discuss the roots of China’s inflation, and a reader might assume it is due to China’s high growth rate and insistence on keeping its currency cheap, which would inflate the price of commodity purchases. But currency mavens like Menzie Chin believe that China has not (until perhaps recently) been sterilizing its purchases of dollars to fund the US current account deficit, which would lead to domestic inflation.

In other words, China needs to engage in much more fundamental changes in its economic and currency strategy to get this problem under control. From the Financial Times:

China is to enforce a freeze on all government-controlled prices in a sign of Beijing’s alarm about rising popular anger over inflation, now at its highest rate in more than a decade.

The order freezes a vast array of prices still under the control of government in China, ranging from oil, electricity and water to the cost of parking and park entrance fees.

The order, issued jointly by six ministries on Wednesday, comes after a vaguely worded announcement on the need to prevent price rises by the State Council, or cabinet.

“Any unauthorised price rises are strictly forbidden . . . and in principle there will be no new price-raising measures this year,” the ministries said. Events since the initial State Council announcement that inflation in August hit an 11-year high of 6.5 per cent appear to have galvanised the bureaucracy into a tougher stance.

Qing Wang, of Morgan Stanley, said in Hong Kong: “As inflation has gotten worse, the government may have felt it had to toughen its stand.”

Rising inflation is sensitive in the run-up to the five-yearly meeting of the Communist party, which is due to open on October 15 in Beijing and will choose the senior leadership until 2012. The sharp spike in inflation is largely due to higher food prices due to a shortage of pigs after a disease killed millions and the rising cost of feed – a global phenomenon.

But Chinese leaders and economists are increasingly worried that the impact of inflation and the subsequent government policy response, could cause severe problems for the economy.

Though they were once solely a domestic concern, Chinese prices are now an international issue because of the possibility of the higher cost of consumer goods produced in China fuelling inflation in large export markets such as the US and Europe.

Beijing has raised borrowing costs five times this year, both to cool lending and to prevent negative real interest rates, which provide an extra incentive for people to take money out of banks to buy shares.

China has raised the one-year deposit rate to 3.87 per cent, which is about equal to the eight-month average for inflation but well below August’s 6.5 per cent.

The price freeze is the kind of administrative measure redolent of China’s former planned economy but it may be less effective in China today, economists said.

“They will not be able to control the price of everything,” said Chen Xingdong, of BNP Paribas, in Beijing.

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