A number of economists are expressing concerns that the Beijing municipal government’s decision to increase electricity prices will add to inflationary pressures and be too costly for many residents.

Although the city’s development and reform commission will hold a public hearing on the planned price hike, previous experience suggests that this will have little impact. A similar hearing took place in June to discuss a 30 percent rise in the city’s water rate, which took effect at the start of this month.

Beijing’s price hikes are likely to be the first in a nationwide wave of rate increases for public utilities, according to Qi Jingmei, an economist at the State Information Center.

“There is a strong possibility that [other municipalities and provinces] will raise prices, because these areas also suffer from water and electricity shortages,” Qi said. “If the price hike spreads across the nation, it will increase the likelihood of inflation -- a major concern in the economic situation.”

Prices for services account for about 24 percent of the entire consumer price index (CPI), policymakers’ key inflation gauge.

China’s CPI rose 5.3 percent year-on-year in July and 3.8 percent for the first seven months, according to the National Bureau of Statistics.

Niu Li, another economist at the State Information Center, said that the government should be cautious about further price rises because inflationary pressures already loom large.

“While food prices remain at high, international oil prices are rising rapidly. There are also signs that raw material prices may have rebounded,” he said.

International oil prices have risen to as much as US$49 per barrel in the past two weeks.

Wang Zhao, a senior researcher at the State Council Development Research Center, said that water and electricity bottlenecks are the reason that the government is considering the price hikes. “A price increase is also a good way to encourage people to conserve these resources.”

However, the price rise would undoubtedly have a negative impact on many residents, noted Wang. Higher prices could mean entry into negative interest rate territory.

“A negative interest rate would mean that people lower their expectations for the future,” she said.

Wang cited a recent survey by the People’s Bank of China, which said that public dissatisfaction with consumer prices was at its highest level since 1999.

A negative interest rate also causes bank deposits to shrink, which erodes purchasing power.

Monthly costs for food for a low-income urban family averaged 34.2 yuan (US$4.10) a month more during the first five months of this year, owing to higher prices for grain, eggs, meat and other related products. That meant a jump of 14.8 percent in average monthly household expenditure on food.

“Some low-income families have even begun to worry whether they will be able to pay for food and clothing,” said Qi. “Their health could also be affected, as they will only buy the cheapest products and with little regard for food quality.”

The impact of the price rise is greater in rural areas. Although farmers’ per capita cash income rose 16.1 percent year-on-year during the first half, retail sales in rural areas grew by just 9.1 percent, 5.6 percentage points lower than in the cities.

Qi suggested that in addition to paying careful attention to citizens’ needs, the government should consider raising the renminbi interest rate to build confidence in the future.

(China Daily August 30, 2004)