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China increases penalties for price-fixing to fight inflation

Firms that hoard goods can be fined up to one million yuan: Cabinet

(BEIJING) China’s Cabinet yesterday sharply increased penalties for price-fixing, expanding an anti-inflation campaign that has failed to cool a surge in politically sensitive food costs.

Food costs soared by 18.2 per cent in November, pushing the overall monthly inflation rate to 6.9 per cent, its highest level in 11 years.

Companies that hoard goods or try to fix prices can be fined up to one million yuan (S$197,055), up to 10 times the previous penalty, the Cabinet said on its Website.

The increased penalties are meant to ‘strike (at) the activities of driving up prices through hoarding or cheating’, the government’s Xinhua news agency said.

In another development, official sources told Reuters that China’s consumer price inflation in December eased to 6.5 per cent from a year earlier, off an 11-year high of 6.9 per cent in November, official sources said.

The consumer price index for all of 2007 probably rose 4.8 per cent compared with a 1.5 per cent increase in 2006, the sources said.

If confirmed when official data are released next week, the December drop would provide some relief to policy makers in Beijing, who have voiced growing alarm about inflationary trends.

But Zhou Xiaochuan, central bank governor, has long expressed optimism that December’s inflation data would show a marked moderation because of a high base effect from a year earlier.

A pace of 6.5 per cent would match October and August as the second fastest on the year.

China International Capital Corp, a top China-based investment bank, raised its forecast for 2008 full-year inflation to 5-5.5 per cent, a full percentage point higher than its previous range.

Ha Jiming, its chief economist, said global oil and grain prices and domestic pork prices would provide most pressure, while China’s new labour law would also push production costs up.

Mr Ha suggested that Beijing lean towards credit tightening, yuan appreciation and agricultural subsidies to ease inflation.

The government’s intervention, announced last week, to hold down prices for basic necessities, potentially including cooking oil and rice, was not a long-term solution, he said.

‘Price controls will not alter people’s expectations on inflation, and negative real interest rates will continue to exist,’ Mr Ha wrote in a note to clients.

Vice-Finance Minister Li Yong said on Sunday that China would have a tough time in 2008 battling inflation.

Strong rumours of a 6.5 per cent December reading have been circulating for several days in China’s financial markets which, nevertheless, remain unconvinced that inflation has peaked.

In August, the government accused Chinese instant noodle makers of pushing up food costs by illegally colluding to raise prices by up to 40 per cent. It has given no indication whether it has evidence of illegal behaviour by other producers.

The price surge, which began in mid-2007, has so far been limited to food and is blamed on shortages of pork and grain. The government raised gasoline and diesel prices in November to curb rising demand, but said that should add only 0.05 percentage points to monthly inflation.

The surge in food prices has been especially painful for China’s poor majority, who spend up to half their incomes on food. And the government worries that sustained high inflation for food could start to push up prices in other parts of the economy.

Higher food costs will hit hard as China prepares for the Chinese New Year in early February, an important family holiday when households stock up on groceries to throw banquets.

Suppliers of meat, eggs and other food have been ordered to report price increases over 5 per cent to the government.

In September, the government froze prices of cooking oil and some other basic food items that still are state-set.

But prices for meat, vegetables, noodles and other processed food are dictated by the market and have risen sharply.

Beijing also has tried to increase food supplies by raising subsidies to pig farmers and imposing curbs on grain exports.

But Premier Wen Jiabao warned last week that with global prices for crude oil, grain and other commodities rising, pressure for Chinese prices to rise ‘is still great’.

Beijing has raised interest rates repeatedly to curb a boom in construction and investment that regulators worry could lead to financial problems if borrowers fail to repay loans. Economists say the inflation spike is due to food shortages and has nothing to do with those concerns.

 

Source: AP, Reuters (Business Times 15 Jan 08)

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