Many factors are affecting the consumer price levels in 2006,
among which the resource price reform has a decisive impact on the
consumer price index (CPI) control.
Tight supply of energy resources, price reform on such resources
as oil, power, water, gas, coal and land as well as the increased
labor costs tend to push prices up this year. But at the same time,
oversupply of most consumer products, stable grain prices,
overcapacity in some industries, low increase of bank loans and
rising imports due to reduced tariffs, will certainly drive the
consumer prices down.
Summing up the above factors, experts generally think that the
consumer price index will drop this year.
But in his report on the work of the government last month,
Premier Wen Jiabao pointed out that the rise in
consumer prices should be kept under 3 percent.
Compared with the 1.8 percent increase in 2005, the target has
left quite some leeway. The introduction of the new weight system
in the CPI calculation is probably the major reason for setting
such a goal.
In the old weight system, food accounts for 33.6 percent,
non-food price and service price were 22 and 44 percent
respectively. The weight of real estate, education cost and expense
of medical treatment were low, and the consumption of energy had no
direct weight, which does not fit the current consumption
tendencies and cannot reflect the real price changes.
The National Bureau of Statistics has made a regular adjustment
on the CPI weight system. The weight of food products decreases
while that of energy, housing and services increases. Therefore,
the CPI increase will possibly be higher than our expectation and a
3 percent increase is a rather practical task.
Among all the factors, the price reform on resources is the most
important and most unpredictable one, which has a decisive impact
on the CPI control. Government departments should be cautious in
reforming the pricing system of resources.
First, a market competition mechanism should be introduced.
To prevent monopoly enterprises from using the reform as a
pretext to constantly increase resource prices, resource suppliers
should be diversified. Non-government capital should be encouraged
to enter. Government supervision should also be
strengthened.
Second, the reform on resource prices should be carried out in a
gradual and differentiated way.
The social and economic conditions for an overall marketization
reform are not mature yet. An all-round reform will possibly hamper
macroeconomic control. A complete liberalization of resource prices
will directly increase prices of resource products. And that will
lead to an investment craze in the upper reaches and increase of
production cost in the lower reaches. Price hikes of lower reach
products will most likely lead to inflation. The public's living
costs will increase, too, which will reduce the total demand level
and lower consumers' actual living standard. China's export will
also be affected.
Thus, the reform on resource prices should take a classified and
measured process. The resource departments should firstly introduce
competition to improve their production efficiency.
Third, the reform cost of resource prices should be shouldered
fairly.
The resource prices were low in the past due to administrative
control. Low resource prices had led to overcapacity in industries,
bad debts in banks and the extensive expansion of the economy,
which have cast a heavy burden on the whole society. Such a cost is
carried mainly by the government and the public.
Once the product prices get raised, the public's living cost
will increase. The industries of lower reaches will be affected
too. Their production costs will increase and profits will
drop.
Profits from increased resource prices, therefore, should not be
fully enjoyed by monopoly enterprises. Instead, they should
shoulder some cost of the reform with low-reach industries and the
public.
Fourth, the reform of resource prices should be carried out with
other co-ordinated reforms.
Resource products almost cover all basic living materials.
Social security and welfare system should be improved to guarantee
low-income earners' living levels.
Resource enterprises' property relations should be straightened
out. Inexplicit ownership and poorly defined right and
responsibility will increase the transaction costs.
The financial and taxation system should be reformed. Production
that causes pollution should be taxed. Taxation concerning
environmental protection should be enhanced to let resource prices
reflect the pollution-control cost. The central government should
give part of the taxation income back to the local government for
their pollution control work.
Fifth, in the reform, a few extremes should be avoided.
In China, many resource industries are monopolized by
State-owned enterprises, which also bear the responsibility of
national resource security. They have the double nature of being
both enterprise and a country's basic product supplier. In the
resource price reform, when the market situation is in their favor,
resource monopoly enterprises tend to use the market for higher
profits and overlook their social responsibility. But when they
meet competition and the resource prices decline, they probably
will use their monopoly capacity to protect their own interests and
act as an administrator. Such a situation should be prevented.
Government macro control should go on to protect public
interests in the reform. China's resource market is still at the
primary stage of development. The resource industries should be
strictly supervised by the government. When the situation is not
mature, excessive marketization of the resource prices should be
shunned.
What the reform targets is the price-forming mechanism to
promote competition in the market. It should not be carried out
only by adjusting prices by resource suppliers. Otherwise it will
enter the vicious circle of price hiking and harm public interests
and the functioning of the national economy.
The author works with the China Price Monitoring Centre
under the National Development and Reform Commission.
(China Daily April 7, 2006)