China Curbs Boost Black Market, Experts Say

China’s plan to ban price increases won’t stop inflation and may only push goods onto the black market, economists say.

We must recall that this is a government that has the capability of apprehending, trying, and quickly executing violators, so they are not lacking in tools to publicize their attitude toward hoarding. And they may well use those tools.

On Jan. 9, the State Council announced a series of tough anti-inflation steps including a price freeze on essential goods and services following a meeting chaired by Premier Wen Jiabao.

The council said prices for fuel, natural gas, electricity, water, heating, and transportation would not be raised “in the near future,” state media reported.

Officials were spurred into action after the annual inflation rate soared to an 11-year high of 6.9 percent in November, driven by rising costs for fuel and food.

Inflation estimates for all of 2007 range from 4.5 to 4.7 percent, far above the 3 percent that the government considers a danger level.

Large producers have now been ordered to seek government permission before raising prices. Big wholesalers and retailers are required to report within 24 hours if they raise prices more than 4 percent, China’s National Development and Reform Commission (NDRC) said.

The government has threatened stiff penalties for vendors and groups that influence prices. New fines of up to 1 million yuan (U.S. $137,000) can be assessed for “maliciously hoarding goods” to drive prices higher.

Measures likely to fail

The State Council has also directed local officials to clamp down on those who spread rumors “that disturb market order,” China’s official Xinhua news service reported.

In interviews with Radio Free Asia, economists said that these measures are bound to fail.

By trying to block the normal market forces of supply and demand, they will succeed only in creating an illusion of stable prices, said Gary Hufbauer, senior fellow at the Institute for International Economics in Washington.

“They really won’t be effective,” Hufbauer said. “What they will do is drive more transactions into a ‘black’ or ‘grey’ area. And then, of course, those transactions will not be covered in an official price index, and then the authorities can claim, ‘Yes, inflation is down.’”

Hubauer called the Chinese government measures a “semblance of official concern, showing that they’re worried about the pain that higher prices are causing the public. It’s a measure of action without any real effect.”

Thomas Rawski, a China expert and economics professor at the University of Pittsburgh, said that price controls will only make the situation worse because they create a disincentive to produce.

The result will be fewer goods that command even higher prices, Rawski said.

“In addition, all this is an invitation for a variety of undesirable activities—black markets, bribery, corruption, searching for subsidies rather than searching for ways to reduce costs and increase output.”

Rawski said that hoarding is also likely to increase, despite government warnings. The government will be unable to stop the practice, he said, particularly because of ties between business and local governments, but it may impose harsh punishments in a few cases to get its point across.

“We must recall that this is a government that has the capability of apprehending, trying, and quickly executing violators, so they are not lacking in tools to publicize their attitude toward hoarding. And they may well use those tools.”

Gary Hufbauer said the government is likely to call off the pricing policy after its negative results become clear. “The hope is that this will be a short-lived public relations exercise that will give way to more meaningful policies within, one would hope, a few months.”

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