Rising prices can gain momentum when an inflationary mindset becomes entrenched and hoarding behavior pushes prices ever-higher. In the 1970s, the United States got so desperate to tame inflation the Gerald Ford administration initiated a short-lived "Whip Inflation Now" with little WIN buttons. China doesn't have a serious inflation problem yet, but Chinese leaders are trying to head off any inflationary psychology.
Toward this end, on May 14 the National Development and Reform Commission (NDRC) price office distributed a question and answer document to reassure the public that inflation is under control.
The National Bureau of Statistics' CPI for April showed a year-on-year increase in prices of 2.8%. The NDRC deconstructs this number to explain why it's not a problem and that inflation will be kept under the government's target of 3% for this year.
Increases in grain, fresh vegetable, and fruit prices account for 1.1 percentage points of the increase, mainly due to short-term factors like drought. NDRC reassures us prices will fall as the supply of vegetables increases with the arrival of spring weather. NDRC says the prices of vegetables in Beijing wholesale markets have fallen 21% since the beginning of May, and in Jiangsu the price of vegetables had fallen 6%.
"Inflation" constitutes a general rise in the price level, but some prices are going down. The NDRC says industrial consumer product prices are still going down. Hog and pork prices are in a slump, despite rising feed prices. In April the live hog price and pork price were down 18.5% and 16.8%, respectively, from the beginning of the year. Bulk soy oil and rapeseed oil retail prices were down 2.1% and .9%.
The news media has focused attention on soaring prices of garlic, Chinese medicine, and mung beans. The last big price spike in February 2008 (when China was hit by unusual winter storms) didn't last long. When pork prices soared in 2007-08, only a few sharp economists anticipated that "what goes up must come down," and pig prices have been on a two-year declining path since 2008. Normally, garlic is much cheaper than pork, but the prices of these two commodities have been converging since 2008. Garlic prices will probably drop like a rock after farmers pump out more of the pungent root this year.
NDRC explains that the rise in garlic prices is due to low prices several years ago that discouraged farmers from planting it. With a smaller supply, the price has been soaring this year. As production recovers, the price will come back down. A lot of Chinese medicine is grown in the southwestern areas hit by drought this year. Meng bean price increase is also due to unusual weather. We will next direct each level of price bureau to watch prices of garlic, Chinese medicine, and mung beans carefully and adopt measures to preserve order in markets if there are "unreasonable" fluctuations.
"The party and government pay close attention to price increases for basic products...All government departments must adopt measures to guarantee supply, stabilize prices, and reduce the impact of price increases on the masses...The government will strengthen monitoring of prices in the southwestern drought area, the Yushu earthquake area products, prices of vegetables around big cities and the price of medium-grain rice.
NDRC promises to continue improving the governors’ “grain bag” and the mayors’ “vegetable basket” responsibility systems. The "grain bag" requires provincial governors to ensure that supply and demand for grain balances in their province. Similarly, the "vegetable basket" system requires mayors to make sure vegetable and meat supplies are adequate for their city. This entails constructing "production bases," arranging interprovincial grain transfers, and storing up grain in warehouses.
NDRC points out that grain reserves were transferred to the drought-stricken southwestern region and transfers of grain reserves from the northeast to other provinces were arranged to even out prices. "Central reserve purchases of frozen pork have also begun to stop the decline in pork prices."
A "green channel" has been established to reduce distribution costs of vegetables, fruits, and meats. This program waives highway tolls for agricultural products, reducing transportation costs.
NDRC gives some examples of local subsidies to boost food supplies. Hunan province and Changsha city invested 16 million yuan to support construction of a vegetable wholesale market; Zhaoyang City is investing 9.8 million yuan to build the largest vegetable production base in that city. Jilin, Shanxi and many other provinces are funding vegetable production and distribution.
The government will crack down on speculation, hoarding, and other behavior driving up prices using drought, low temperatures, hail and other weather events as an excuse. NDRC directed the Guangxi price bureau to "deal with" speculative activity, and the price departments in Guangdong and Yunnan are now dealing with unreasonable price increases for Chinese traditional medicines.