Punishment for Price Hikes

China tries to manage inflation by fining companies for price increases.
By Michael Lelyveld
unilever305.jpg Bottles of Unilever shampoo are displayed at a supermarket in Beijing, May 11, 2011.

China has been cracking down on companies to discourage price hikes instead of fighting inflation with policy reforms, experts say.

In an unusually strong measure on May 6, the National Development and Reform Commission (NDRC) announced a stiff fine of 2 million yuan (U.S. $308,000) against consumer products giant Unilever PLC for making statements about possible price rises in late March, Dow Jones reported.

Unilever and competitor Procter & Gamble both mulled plans to raise soap and detergent prices in April due to higher costs, but the increases never took effect because authorities intervened after "panic buying," Reuters said.

In a notice on its website, the NDRC said that Unilever's comments "intensified inflationary expectations" and "seriously distorted market order."

"As a responsible company, we abide by laws and regulations in China and our global code of business principles," Unilever said in a statement. The Anglo-Dutch company said it accepted the decision by the NDRC and the Shanghai Price Bureau, Britain's daily The Telegraph reported.

The NDRC said the fine was assessed "to break ugly habits and build new rules."

But Gary Hufbauer, senior fellow at the Peterson Institute for International Economics in Washington, said that punishing companies for higher prices is a substitute for sound policies to bring inflation under control.

"It sounds like the Chinese government is going down the path of other governments like Argentina and Zimbabwe that have faced similar inflationary problems," Hufbauer said in an interview.

Price pressures

China's government has been on edge over prices since last year when inflation crept up to 3.3 percent, topping the government's target. In March, the rate reached 5.4 percent, hitting a 32-month high before dropping slightly in April to 5.3 percent.

Hufbauer said the government seems to be singling out foreign firms for responding to price pressures instead of dealing with problems of monetary policy, the undervalued yuan and huge capital inflows that have spurred inflation.

"It's easier to blame the foreigners and try to mislead the public about the real cause of it," he said. "This is the kind of big lie that has historically gone on."

Gordon Chang, who writes the New Asia blog at forbes.com, said it does seem that Unilever was singled out, since state media reported that four detergent makers, including two Chinese companies, were expected to raise prices by up to 15 percent. Only Unilever was fined.

U.S.-based Procter & Gamble has said it does not rule out higher prices but would raise them only as "the last option," the official English-language China Daily reported.

The NDRC has reportedly met with over a dozen industry associations, bringing pressure on members to keep prices down.

Bitter memories

David Bachman, a China specialist and professor of international studies at University of Washington, said the Unilever incident shows hypersensitivity to inflation on the part of both the public and the government.

Citizens have bitter memories of inflation in the late 1940s and again in 1988, when rising prices helped to stir social instability, Bachman said.

In the most recent case of the detergents, the companies might have been better off if they had simply raised prices without signaling their plans in advance, he said.

But because citizens fear the government is usually concealing bad news, they rush to buy and hoard goods at the first hint of an increase.

"If you announce it, that seems to send a signal that a whole bunch of other things are going up, so it's better to buy now," said Bachman. The wildfire reaction makes the government vigilant to stamp out the first sparks.

The same social dynamic has been behind the run-up in real estate and housing prices.

"The rumor networks and blogs are leading people to think that prices are on the verge of getting out of control," Bachman said. That concern has broad social consequences.

"There's nothing like inflation to erode confidence in the future," he said.

The effect of the yuan's exchange rate on inflation was a focal point of U.S.-China Strategic Economic Dialogue meetings in Washington on May 9-10.

"China's leaders increasingly acknowledge the importance of currency appreciation as a tool to fight inflation and have committed to promote greater exchange rate flexibility," the U.S. Treasury Department said in a fact sheet.

Dow Jones quoted a senior Treasury source as saying that Chinese officials are now "much more motivated to use their currency to fight inflation," but they made no new commitments on exchange rates.

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