China Vows Resource Price Reform

2006-08-25
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Aug. 12, 2004: A worker fixes wires at an electric post in Shanghai, 12 August 2004. Photo: AFP/Liu Jin

China plans to fight runaway economic growth and energy consumption with a program of price reforms for resources, officials say. But analysts believe that price hikes will remain moderate to avoid the risk of instability.

On August 14, China Daily’s English-language Web site quoted an official of China’s National Development and Reform Commission (NDRC) as saying that his agency will liberalize prices for energy and raw materials.

“We will allow the scarcity of resources to determine their price,” said Bi Jingquan, NDRC vice minister in charge of price reform. Unnamed “industry insiders” said that this is the first time the government has formally declared its intention to implement the move, China Daily reported.

Bi said the measure will “definitely increase costs” for basic commodities including coal, electricity, oil, natural gas, and water. The statement coincided with a report issued by the State Council’s Development Research Center (DRC) calling for price reforms to promote more efficient growth.

Given that most of the energy industries in China are monopolies, I don’t see how they can really move toward a true liberalization in the way that our market works,

‘Sudden or sweeping’ steps unlikely

In interviews with Radio Free Asia, experts doubted that China’s government will allow prices to seek their own level in an open market, at least during this year.

Jing Huang, a senior fellow in foreign policy studies at the Washington-based Brookings Institution, said that steps toward price reform are unlikely to be sudden or sweeping, given that energy and other resources have been controlled for decades by state monopolies.

Bi Jingquan’s statement and the DRC report are signs that the government is at least preparing to move in the right direction, though, Huang said.

“Even if it’s a state monopoly, they want to use some so-called market mechanisms to handle the situation. This price reform obviously is a first step.”

“I believe it’s the right decision,” Huang added. “It’s a decision that has been long overdue, and the problem right now is how far and how fast and how deep this policy change can go.”

Subsidies, structural reform also needed

David Fridley, deputy leader of the China Energy Group at the U.S. Department of Energy’s Lawrence Berkeley National Laboratory in California, agreed that monopoly control could make reform more difficult, in part because it is competition that lets prices rise and fall in a free market.

“Given that most of the energy industries in China are monopolies, I don’t see how they can really move toward a true liberalization in the way that our market works,” Fridley said.

“But certainly, raising the prices or benchmarking them higher is a real possibility at this point.”

Fridley added that for China to put full-scale price reforms for energy into effect, the government will have to design subsidies that can quickly reach farmers and other poorer sectors of the country’s economy. Otherwise, the gap between China’s rich and poor will widen, he said.

Fridley noted that structural problems within each resource sector could also slow China’s moves toward price reform. For example, Fridley said, the government has ordered only small rate increases for electricity, and these have not slowed consumption.

China’s government has “no effective oversight or regulation of the industry,” Fridley said.

“The entire system would need a thorough reform, which I’m not sure is likely what’s going to come out of this.”

Original reporting by Michael Lelyveld. Edited for the Web by Richard Finney.

Original reporting in Chinese

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