BIZCHINA> Review & Analysis
Leave food, oil prices to markets
By You Nuo (China Daily)
Updated: 2008-05-05 10:21

Publishing negative news can have a positive social effect. China has learned plenty of lessons about that in the last few years. Reports on the outbreak of SARS (severely acute respiratory syndrome) in 2003, and at the moment, on the spread of the hand-foot-mouth disease, caused by the virus EV71, are cases in point.

Just as in the latter case, when a nationwide coordination began over the weekend to combat a children's disease, little known earlier and never considered so dangerous, things that need to be done require a whole nation's support. These cannot be done by just a few officials when they are afraid to lose face, or even when they assume that somehow they can still manage things by themselves.

But little has been said about how the nation is going to deal with the inflation that is facing the entire world. For quite some time, the country has been trying to keep the fuel price lower than in the global market. But in order to prevent fuel smuggling, it has to keep the supply to its southern coast, cities on the Pearl River Delta, at only a minimum level.

Many gas stations run out of their everyday stock by early afternoon and cannot resume service until 7:30 am the next day, as I noticed during a recent business trip to the province of Guangdong. A lot of inconvenience, and inevitably more waiting time, has been caused to local drivers and their companies. The opportunity cost is huge.

Now, there is another low-price supply in contrast with its surging price in the world. That is grain - particularly rice nowadays. When the price of rice in Thailand rose from some $300 all the way to $1,000 per ton in barely one and half months, its Chinese equivalent remains at no more than 2,000 yuan, or less than $300.

Energy and food are the two key areas where inflation is strong, as a result of both the slow increase in crude output, and the substitute energy's encroachment of farmland. The world may only be at the beginning of relatively long, and occasionally tumultuous, cycles caused not only by its farewell to cheap oil, but perhaps also that to cheap food.

More importantly, early actions may be worthwhile before everybody is convinced that the current bout of inflation is having an annoyingly long cycle. Developing alternative energy and planting more trees both need time. And in both areas, entrepreneurs deserve to have sufficient price incentives to come up with new solutions.

A subsidy scheme, however, only helps entrepreneurs who provide the old supplies and actually tends to delay the work of other entrepreneurs who are working on the new supplies. This could be very harmful to the long-term health of the economy.

To restore the balance between energy and food supplies also requires the fine-tuning of many existing policies. The general price level of farmland, for instance, may be increased, along with those of some other key items, such as irrigation water and related services.

Some standards may also be readjusted in urban development, considering the possibility for gasoline to become too expensive for most private car owners. To save residents' transport costs, a greater emphasis could be placed on public transport and housing projects not very far from the city center. But no one is likely to have a basis for rationally calculating what actions to take unless the market prices reflect the need for such changes.

There is really no need for the government to promise to the public that it can put an end to the price rises, which no government in the world can. Insisting that the economy is facing not an allround cycle of inflation but only "structural inflation", as some government economists did, makes even less sense.

A better way to react is to tell the public about the facts of the global markets, and to act in a timely way to show to the public what changes are needed. The only result of pretending not to see a problem is to let it become an even more deeply entrenched one. Why do we have to do that, after all?

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