Chinese Government Freezes Some Prices in Move to Contain Inflation

[Coronita]

I posted a comment on another thread about what I perceived an issue with the Chinese Government and its economy.

The context of the thread was there were some that suggested China would be a great place to invest.

My comment was, even today the Chinese government exerts way to much control over it's economy to the point that it economy doesn't really run  by itself. Governments can/will introduce new policies sporadically and change the markets overnight, in a haphazard way. It isn't a free market. This is all about control.

Here's an interesting article.  

 

Foreign investor beware.  

 

Chinese Government Freezes Some Prices in Move to Contain Inflation

BEIJING (AP) — China's government has ordered some prices frozen and told officials to closely monitor others in its most drastic step yet to contain a surge in inflation.

The order, issued by six government agencies late Wednesday, came after inflation rose to 6.5 percent in August — its highest monthly rate in 11 years — propelled by a double-digit rise in politically sensitive food prices, including pork, the country's staple meat.The statement stressed the importance of maintaining "market stability" ahead of a key Communist Party meeting next month. It said controlling inflation would affect China's development, reform and stability.

The order said government-set prices would be frozen through the end of the year, though it did not specify which items were covered. A man who answered the phone at the cabinet's planning agency, the National Development and Reform Commission, and refused to give his name said he was unclear what goods would be affected.

A list on the Web site of the Beijing city government planning agency said products for which the state still controls prices include cooking oil, sugar, gasoline, tobacco, salt, coal and fertilizer.

The government's latest move could help to contain inflation in free-market prices by reassuring producers of stable costs for energy and raw materials, said Minggao Shen, a Citigroup economist in Beijing.

"I think it will help change expectations a bit," he said. "Some companies might have wanted to raise prices because of expected higher energy or resource prices. Now they can postpone that."

About one-third of prices in China are government-set, with the rest left to the market, according to Shen.

The inflation spike came amid a boom that saw the economy expand by 11.9 percent last quarter, while prices of Chinese stocks and real estate are soaring. The country's main stock index hit a new high of 5,460.08 points on Thursday morning. The government has raised interest rates repeatedly and imposed investment curbs in an attempt to cool the boom, but its efforts so far have had little impact.

Market order must be maintained to ensure the "smooth opening of the 17th Party Congress," said the government order. It was issued jointly by the ministries of finance, agriculture and commerce, the cabinet's planning body and two other agencies.

The ruling party congress, held once every five years to appoint senior leaders, opens Oct. 15 and is expected to see President Hu Jintao consolidate his power by promoting allies to key posts.

Communist leaders are especially worried about the political impact of soaring food prices, which hit China's vast, poor majority especially hard. Families in the countryside and the urban working class spend about one-third of their incomes on food.

Pork prices have soared due to shortages blamed on a decline in pig rearing, rising feed costs and an outbreak of a pig disease that killed more than 70,000 animals and infected 280,000 this year.

The government has tried to bring down the price of pork, the country's staple meat, by encouraging farmers to raise more pigs with promises of free vaccinations and other aid.

Wednesday's order told local authorities to closely watch market prices of pork and other meat, eggs, electricity and liquified gas but did not order controls on them.

In July, the government barred local authorities from changing state-set prices for consumer goods in areas where they had already surpassed official targets.

 

[JWM in SD]

Point Taken FLU, thanks.

[drunkle]

hmm. the yuan is tied to the dollar, deflation of the dollar = deflation of the yuan. fixing prices means suppliers, importers will lose money on their products.

if the people stock up on supplies, the dollar continues it’s slide… china might run out of food…

[Anonymous]

Based on the report, the Chinese government controls prices of “cooking oil, sugar, gasoline, tobacco, salt, coal and fertilizer”, plus whatever food items that the new order will cover. It doesn’t control EVERYTHING. Prices of stocks and commodities such as gold or copper are spared. If I had money to invest, I would invest in Chinese companies working in environmental protection, pharmaceutical research, or renewable energy fields. China has to clean up its land and rivers, provide medicines for its billions of citizens, and stop draining the oil and coal resources around the world.

———
You are what you eat.

[Coronita]

Based on the report, the Chinese government controls prices of "cooking oil, sugar, gasoline, tobacco, salt, coal and fertilizer", plus whatever food items that the new order will cover. It doesn't control EVERYTHING. Prices of stocks and commodities such as gold or copper are spared. If I had money to invest, I would invest in Chinese companies working in environmental protection, pharmaceutical research, or renewable energy fields. China has to clean up its land and rivers, provide medicines for its billions of citizens, and stop draining the oil and coal resources around the world.

 

I was using it as just one of many examples. Here's about one that I'm all too familar with concerning Shanghai real estate back in 2005. Unlike in the U.S., a lot of rules regulations are set at the province level, and set sporadically.

 

http://en.epochtimes.com/news/5-6-6/29327.html 

In an attempt to stabilize rising real estate prices, China instated a new real estate policy recently. However, the market responded negatively; both the trading volume and trading prices fell dramatically.

The Chinese government announced in May that starting June 1, a tax would be placed on all housing sold if the owner hadn’t lived in for more than two years. For non-residential housing inhabited for more than two years, the government also placed a business tax on the difference between the sale price and the original purchase price.

On June 1, 2005, the first day China implemented its policy, the average trading price for real estate in Shanghai dropped by 1,426 yuan (US$172.30) per square meters to 5,884 yuan (US$710.93).
　　
The trading volume for new commodity housing was 251, only half of what it was the day before the new policy was implemented, according to Shanghai’s official real estate transaction data. In general, trading volume was only one half what it was usually.

President Hu Jintao and Premiere Wen Jiabao have realized that rapidly rising housing prices have caused serious threats to overall economic stability. High-level officials in the State Council recently issued a notice about stabilizing real estate prices. It gave eight directives, explicitly ordering local governments and relevant departments to keep real estate prices from rising too quickly.

Despite their fear of a drop in housing prices, they were also afraid of weakening the already struggling state-owned bank system, said Free Radio Asia commentator Liang Jing. Liang said that Hu and Wen hesitated and did not take any firm measures regarding the continuing rising housing prices because they are afraid that big changes in real estate prices will deliver an unbearable blow to the already weak state-owned banks, according to his article “High Real Estate Price Challenges Hu and Wen’s Governing Capability.”

Because house developers and home-buyers in mainland China rely heavily on loans from state-owned banks, a sudden drop in realty prices will worsen the crisis for state-owned banks. Approximately 50 percent of the total capital in China’s state-owned banks is invested in the real estate market. Any sharp decline in the real estate market will hit the banking system directly.

According to the Chinese government’s regulation, starting June 1, transaction taxes will be exempt for ordinary housing only if a property ownership certificate has been obtained or contract taxes have been paid for more than two years. On June 1, the Beijing Construction Committee published the tax at 5 percent for Beijing and 5.5 percent for Chongqing, according to a June 1 report from Jinghua Times.

Real estate agents in mainland China estimate that the taxes may cause housing prices in Shanghai to drop 20 percent or more. Yi Xianrong, Chief of the Banking and Finance Division, the Research Institute of Banking and Finance under Chinese Academy of Social Sciences believes that the real estate price will drop in Shanghai, and he will not be surprised to see a drop by as much as 50%, due to the big bubble in Shanghai housing market, reported the latest edition of China News Weekly.

High-end market sales are where most of the price difference will be felt. Infrastructure for mid range housing will protect prices from falling and the lower end market will not be effected.

Prices had been dropping throughout the month of May as real estate speculators reduced their prices to make sales before the June 1 deadline. Just before June 1, long lines piled up outside real estate transaction centers across Shanghai. In the month of May after the policy was announced the real estate price in Shanghai and Hangzhou city dropped nearly 10 percent, and the resale of homes dropped 50 percent.

This is not the first time that real estate prices in Shanghai have risen and then sharply fallen.

In 1993 when Vice Premier Zhu Rongji took the first macro-control measures, the real estate market froze An old Taiwan businessman recalled that the price for housing in Hongqiao and Gubei suddenly dropped from $US3,000 per square meter to $1,500. Not only were there sharp price cuts, but nobody would buy the discounted houses.

Now investors from Taiwan, Hong Kong and South East Asia who want to buy real estates in Shanghai cannot help but wonder if there will be another real estate price collapse.

 

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There chinese stock market is in uncharterred territory. I wouldn't be surprise if we start seeing more sporadic controls and rules to curb the runup.

 

[bsrsharma]

Don’t know much about China’s policies; but Nixon instituted price & wage controls in 1973-74 to control runaway inflation after Vietnam War. It may happen here (in USA) again. It has been done in many countries. Short term price control is not all that uncommon.

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