China Imposes Price Controls

In recent days, China has announced the imposition of strict price controls on basic consumer items, according to FT.

The controls come about after annual inflation in the country hit 5.4% for the 12 months ended March 2011.

According to FT:

The price department of China’s powerful state planning agency – the National Development and Reform Commission – met earlier this month with 17 industry associations and ordered them to delay or cancel planned price increases.

The quasi-government industry associations included those overseeing agriculture, pharmaceuticals, fisheries, home appliances, cosmetics, meat, vegetables and many other basic consumer items.

In the past week or so the NDRC has also directly ordered flour and cooking oil producers to delay price increases, according to state media reports, and has even applied price controls to large global groups operating in China, such as Unilever.

Price controls are always an attempt by government to fight economic reality. If economic forces are pushing prices toward a certain level and government attempts to institute price controls will only result in shortages and long lines for the purchase of goods. It is an extremely crude tool of economic coercion that can suck the life blood out of an economy. This is not a sound move by Chinese officials and may signal the end to the recent Chinese super-growth.

Separately, in a speech to the governing State Council, Chinese Premier Wen Jiabao said Beijing would, along with other policy measures, “further improve the yuan exchange rate mechanism and increase yuan exchange rate flexibility to eliminate inflationary monetary conditions”.

This is an attempt to slow money supply growth in China to fight the inflation. Slowing money supply growth is a much more effective way of battling price inflation than price controls. It gets at the heart of the problem, i.e. the growing money supply which results in more money to bid for goods.

The news on the exchange rate comes after several interest hikes and hikes of the reserve requirement, by the People's Bank of China.

Since October, the PBOC has raised benchmark interest rates four times and increased the ratio of deposits that banks must hold in reserve six times, to 20 per cent for China’s largest lenders. The slowing of money supply growth will ultimately choke off the manipulated boom in China and lead to the downturn phase of the business cycle, which is experienced whenever countries who have manipulated interest rates to create a pseudo boom stop the money printing manipulations.

Between the price controls and the slowdown in money growth, things are not going to be pretty for the Chinese economy.