China, still a command economy?
By George Chen
The opinions expressed are the author’s own.
What happens in China will soon affect the whole world — inflation being a case in point.
Just last month we saw news that U.S. fast-food chain operator McDonald’s had decided to raise menu prices in mainland China by 0.5-1 yuan. McDonald’s was fast to react to China’s growing inflation. Others may feel it’s already too late to raise prices because of the government‘s increasing price control policies.
According to an official announcement posted on a Kunming government website, one of the largest cities in southwestern China, five retailers including Wal-Mart and Carrefour have been ordered to report any price adjustments with clear reasons for the changes in advance, with the final decision in the hands of the local government.
The order is part of newly imposed temporary price controls to help Kunming fight fast-growing inflation. The notice said the controls would take effect immediately and remain in place until Feb. 28. I’m not sure how shareholders and investors of Wal-Mart and Carrefour will feel if news of the move spreads to Europe and the United States. French people are known for their deep love of freedom and now the two companies will have to think of ways to maintain profit growth in China as the cost of sales rises.
More importantly, how will you balance your economic interests in the short term and your relationship with the Chinese government in the long run? Even the CEO of Wal-Mart gets the point: it’s still a tough job to get investors on the same page, otherwise the share price might have to take a hit.
Kunming is not alone.
Soon after the State Council, China’s cabinet, asked mayors to take serious steps to address inflation, many local governments started work on policies to control prices.
In Guangdong province, one of the country’s richest, where local media have reported that three dairy makers raised retail prices for milk products by about 10 percent last week, the local government is also mulling similar policies. The powerful economic planner NDRC talked with major food product makers, asking them not to raise prices for daily necessities such as cooking oil for the next four months at least, local media reported.
China has applied price controls during previous bouts of inflation with mixed results. As my Beijing colleague Zhou Xin noted, in 2007, Lanzhou, capital of rural Gansu province, capped the price of beef noodles. Although the move was initially popular, some residents soon complained that restaurants had in turn cut portion sizes.
This round of price controls, from the central government to local government, level may last until the spring, when Beijing will hold the country’s most important annual political meetings, some analysts said. The controls should help Beijing cap the CPI level but it’s far from a sustainable situation.
Before foreign companies such Wal-Mart become frustrated, state companies such as COFCO, the country’s No.1 food importer and exporter, have already shown signs of impatience — some COFCO officials have privately complained that price controls will eat into profitability, and their employees will not be happy to see a smaller year-end bonus, local media reported.
The situation will be the same at other enterprises. Employees are also consumers. At the end of the day, who’s going to boost domestic consumption to maintain economic growth?
George Chen is a Reuters editor and columnist based in Hong Kong.
Photo: People carrying groceries walk along a street in Hefei, Anhui province November 18, 2010. REUTERS/Stringer