(China Daily)
Updated: 2007-08-11 05:07

The government should relax its control of prices and let the market play its due role, says an article in Shanghai Securities News. The following is an excerpt:

According to the National Bureau of Statistics, the consumer price index (CPI) rose 4.4 percent year-on-year in June, a record high in the past 13 months. In addition, for the third time this year, the central bank lifted interest rates last month in a bid to control the overheated economy and reduce inflationary pressures.

Statistics show that the rise in CPI was caused mainly by rising food prices, which had its origins in grain and pork price hikes.

There are three major reasons for the rise in grain prices. First, the continuous decrease in cultivated land has restricted the increase in grain production. Second, as fertilizers and energy prices rose by large margins, grain production costs also rose. What is more, the development of bio-energy has led to big demand for corn, which increases the prices of fodder and related products. Increased costs have affected the total production, which directly led to the rise in pork prices this year. Then eggs and fat products followed suit, which finally led to across-the-board food price hikes.

From a micro perspective, food prices rise because of the short supply and increased production costs. From a macro perspective, there is an intrinsic necessity for food price rises.

The prices of industrial raw materials, especially energy, decide agricultural production costs. As the prices of industrial raw materials rise greatly, an overall rise in the cost of agricultural products becomes unavoidable. Similarly, the prices of agricultural products decide the prices of some industrial raw materials and human resources; fluctuations in the price of agricultural products will affect the costs and prices of industrial products. Such intrinsic relations can be represented by the price relations between industrial and agricultural products. And the price ratio is normally within a certain level.

But in the past few years, the price ratio between industrial and agricultural products has increased.

The consumption of energy resources is increasing at a steady rate while known oil reserves can only meet the world's need for another 50 years. The development of substitute energy and bio-energy remains in its infancy. Various factors decide that energy prices will not fall to their previous low level. The prices of steel, coal and other nonferrous metals face the same situation. To keep the price ratio of industrial and agricultural products at a normal level, agricultural product price rises are inevitable.

This round of price hikes and the increase in CPI are just passive rises after the prices of basic industrial goods rose. The short-term explosive rise came after the government's administrative policy to control price rises lost its efficacy. Had the government relaxed its controls of grain prices and encouraged stable price adjustments, the public would have found it easier to accept the rises and farmers could have had a chance to increase their incomes.

The government should no longer control prices in such a rigorous manner. It should follow the trend and let the market adjust the production structure and the industrial structure. The past planned economic pattern greatly impeded the development of productivity in China. It is a lesson we should pay serious attention to.

(China Daily 08/11/2007 page4)