China Considers How to Keep Food Prices Down

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The Chinese government is developing a plan to combat high food prices, which have been growing at a double-digit pace.China's premier says Beijing is preparing measures to rein in double-digit rises in food prices, stepping up efforts to reassure the public about surging living costs that communist leaders worry might spark unrest.

Premier Wen Jiabao, the country's top economic official, said the Cabinet is "drafting measures to suppress sharp rises of commodity prices, which concerns people's immediate interests," the official Xinhua News Agency said late Tuesday.

It gave no details, but the official newspaper China Securities News cited unidentified officials as saying authorities were considering price caps, subsidies and stricter punishments for hoarding or speculation in corn, cotton and other products.

Food prices jumped 10.1% in October, pushing overall inflation to a 25-month high of 4.4%, well above the government's 3% target. That prompted worries Beijing might raise interest rates or tighten economic controls and further slow China's growth from high levels, but analysts say inflation is limited so far to food.

Why Inflation Tops Political Agenda

Inflation is politically volatile in China, where poor families spend up to half their incomes on food. Rising incomes have helped to offset price hikes, but inflation undercuts economic gains that help support the ruling Communist Party's claim to power.

"Inflation is one of the biggest political issues today," said Robert Broadfoot, managing director of the Political and Economic Risk Consultancy in Hong Kong. "I think you're going to see isolated demonstrations over living costs."

Chinese stock markets have dived this week as jittery investors wait to see whether Beijing imposes price controls or hikes interest rates again following an Oct. 19 rate increase, its first since the financial crisis.

"Inflation is the biggest concern not just for financial markets but for people's daily life," said Liu Kan, a market analyst for Guoyuan Securities in Shanghai. "Any tiny change in policy will shake investor confidence."

The jump in food costs came as Beijing is trying to steer China's rapid growth to a more manageable level and restore normal conditions following its stimulus-fueled rebound from the global crisis. Beijing ordered banks last week to increase reserves to curb loan growth.

A report by a government think tank this month suggested inflation might be even higher than reported because official data fail to fully account for costs of services and housing.

The economy also faces strains from diesel shortages triggered by government conservation efforts. Authorities have imposed rolling blackouts on factories to meet energy-saving goals, prompting thousands to buy their own diesel-powered generators, which boosted demand at a time when industry analysts say China's major state-owned oil companies are withholding supplies in anticipation of a rise in the government-set price. That has led to rationing and long lines at filling stations, disrupting cargo shipments.

Inflation Management Key to Leadership

The ruling Communist Party's ability to manage inflation could play a key role in the impending handover of power to a new generation of leaders, Broadfoot said.

"They're going to be talking about inflation because it has a direct impact on social stability," he said. "Leaders who were going to be promoted, if there are protests, won't be promoted. In those areas where stability was maintained, those leaders will get the inside edge on being promoted."

Analysts have warned that stimulus money and a flood of bank lending coursing through the economy might add to pressure for prices to rise in other sectors.

On Tuesday, a Commerce Ministry spokesman said the government is releasing stockpiles of pork and sugar to increase supplies in the market and curb price rises.

Wen made his announcement during a Nov. 11-12 visit to the southern province of Guangdong, where the Asian Games are taking place, Xinhua said. It gave no reason for the delay in publicizing his comments.

Some analysts say food price inflation has passed its peak and should decline but Chinese media say the cost of some basic goods is still rising strongly.

The price of sugar rose 1% in the first week of November over a week earlier, meat and eggs by 0.8% and cooking oil by 0.5%, according to the official Xinhua News Agency.


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