Price Hike Problems

Price Hike Problems

Recent price hikes of various farm produce are quickly fueling infation expectations across China. Even sideline products such as garlic and mung beans have become indicators of infation. But why are these price hikes occurring in the frst place? And what measures are being taken to stabilize them? Peng Sen, Vice Minister of the National Development and Reform Commission (NDRC), answered these questions in an interview with Xinhua News Agency. Edited excerpts follow:

What are the major farm products affected by this round of price hikes?

Peng Sen: Prices of some farm products have soared since the end of last year, including rice, corn, vegetables, garlic and mung beans. At first, it was the extreme weather including drought and low temperatures that caused price hikes for rice and vegetables. Then in March and April, speculators cornered herbal medicine ingredients such assanqiand seed of Job’s-tears. The purchasing price ofsanqihit a record high of 660 yuan ($96.6) per kg from 120 yuan ($17.57) per kg in 2009. Now it has fallen to 460 yuan ($67.3) per kg, due to investigation and intervention by price regulators in Guangdong and Yunnan provinces.

Since the end of April, speculators set their eyes on dried garlic and mung beans, pushing the retail price for dried garlic to 16 yuan ($2.4) per kg. But the garlic price began falling in May and has settled at 4 yuan ($0.6) per kg, because garlic produced this year became available at the market. The price for mung beans even skyrocketed to more than 20 yuan ($2.92) per kg in some supermarkets. It’s unbelievable.

Price fluctuations for farm produce happen all the time, but why is this round of price hikes so steep?

We believe the supply-demand imbalance has contributed to the price hikes. On one hand, planting areas in the suburbs diminished quickly during China’s fast industrialization and urbanization process and have affected the supply of farm produce. On the other hand, demand for grain, vegetables and meat has increased as a large number of farmers, who used to produce such products, have become consumers of those products while working as migrant workers in urban areas. In addition, as a result of diminishing planting areas in the suburbs, large cities now rely on farmers in other regions. This has contributed to increasing transportation and labor costs, as refected in vegetable prices.

But these long-term factors will only lead to slow price increases, not short-term price hikes. Dealers with speculative motives, in addition to this year’s extreme weather—such as drought in southwest China and lasting low temperature in central and east China—have pushed prices of certain farming goods to an unreasonable level.

FAN CHANGGUO

Why was this timing special for speculators? Why were these varieties favored?

The property and stock markets absorbed large quantities of liquidity last year. But following a string of measures aimed to cool down the property market, excess cash of a speculative nature that withdrew from the stock and property markets had to look for new targets.

Except for rice and vegetables, the targets of speculative dealers are generally sideline and seasonal products that enjoy all-year but comparatively small demand. With limited supply, they are easy to stock up and speculate with. In contrast, grain is in a better position to cushion the impact of relevant speculations with huge national reserves.

What are the challenges this round of price hikes pose to the Central Government’s management of inflation expectations?

While adding to the living costs of urban residents, farm produce price hikes are not necessarily a beneft for farmers. Therefore, stable produce prices are conducive to easing burdens on consumers, maintaining balanced agricultural production and quenching infationary expectations.

Price hikes of sideline products such as garlic and mung beans will have limited direct impact on the consumer price index (CPI) because these varieties have comparatively small and more elastic demand than rice or corn does.

But the problem is that these price hikes send signals of further increases and reinforce inflation expectations, especially as some dealers continue to stockpile such products. If we fail to curb such speculative activities, it will make it even more diffcult for us to manage infation expectations, stabilize prices and ensure the people a peaceful life.

The Central Government recently reiterated the importance of a balance between maintaining stable and comparatively fast economic growth, adjusting the economic structure and managing inflation expectations. The key to effective inflation expectation management is liquidity man-agement. We should maintain a reasonable relationship between economic growth and money supply through comprehensive monetary policies. The major task of price regulators is to ease and guide infation expectations with concrete measures.

The State Council pledged to address price hikes of farm produce, especially to curb speculations with tough measures at a recent executive meeting. What are the guarantees of the timely implementation of such measures? Are this year’s targets of price controls attainable?

At the State Council’s meeting, all aspects of the recent farm produce price hikes have been analyzed and the State Council decided to address both the symptoms and the roots of the problem. The NDRC, the Ministry of Commerce, and the State Administration for Industry and Commerce are required to launch a campaign to reinforce relevant supervision efforts, curb speculative activities of farm produce, and punish dealers who ally with each other to manipulate the prices, monopolize the market and block the free circulation of these products. The NDRC has sent out more than 10 investigation teams on field-study trips nationwide. They are working on a long-term mechanism for stabilizing the production and price of farm produce including vegetables. The research will focus on the establishment of vegetable production bases, farm produce wholesale markets and a highly effective logistics system.

It was stressed at the meeting that local governments should shoulder major responsibilities in encouraging agricultural production, ensuring supply and stabilizing prices. Local government leaders should take the responsibilities in ensuring local residents an abundant supply of rice, grain and vegetables at stable prices.

Price regulators have found clues of garlic and mung beans speculation through recent market inspections and examinations, and if confirmed, these speculators will get their due punishment. They will also strengthen efforts in monitoring, analyzing, as well as predicting changes in the pricing and supply-demand of major farm produce in the domestic market.

In the long run, production and supply guarantees, and availability of a uniform, standard and reasonable farm produce market system will help solve the problem at its roots.

China’s economic recovery is accelerating in the desired direction of macro-control. The generally loose supply-demand balance at the domestic market gives the government some leeway in putting the CPI growth within 3 percent this year. And we will do our best to keep the prices stable.