China Price Controls More Damaging Than Storms, Experts Say


China’s recent snowstorms may do little damage to the country’s economic growth this year if the government follows sound policies, experts say. But they warn that continued price controls will spur shortages and add to strains on power supplies.

China has been struggling to restore services following storms that struck in mid-January, crippling 21 provinces, autonomous regions, and municipalities. The State Council has said that power supplies to residences have “basically been restored” and set a goal of normalizing all service by the end of March.

The effects of the storms on food supplies and prices remain unclear.

Interruption of electric power is the surest way to slow down economic growth.

The government has been trying to keep consumer prices in check by a variety of means. On Jan. 9, the State Council ordered a price freeze on fuel, utility, and transport following a surge in inflation to a decade-high 4.8 percent last year.

On Jan. 16, the National Development and Reform Commission announced price curbs for food and staple goods, prompting criticism that the government is seeking to restore central planning controls.

Economists blame government interference with profit incentives for a drop in coal supplies before the storms began, aggravating power shortages during the crisis.

Experts said China’s price-control policies will likely cause shortages again.

‘Greater losses’ from price controls

Dale Jorgenson, an economics professor and director of Harvard University’s Program on Technology and Economic Policy, said “I think the storms [themselves] are going to have a minimal impact, and that will soon be over.”

“So I think we have to concentrate on the problems of these policies and try to urge the Chinese to reconsider them. I think that they’re just not going to work.”

Gary Hufbauer, senior fellow at the Washington-based Peterson Institute for International Economics, agreed that government price freezes could lead to greater losses than those caused by the snowstorms alone.

“Interruption of electric power is the surest way to slow down economic growth,” Hufbauer said. “It’s one thing to not have power to households so that everybody’s cold and miserable, but it’s quite another thing to interrupt power to the industrial plants, because then they just shut down.”

China’s economic loss from this year’s snowstorms alone may be no more than a quarter to a half of a percentage point of GDP, Hufbauer said. But he added that damage could be greater if the government continues to follow bad economic policies.

“The worst thing that’s happening in China today in terms of the growth situation is the inflation pressure,” Hufbauer said. “And the second-worst thing is the way they’re dealing with it, which is these price controls, which of course will be ineffective.”

“But along the way to being proven to be ineffective, they will create all sorts of additional corruption on top of the corruption which already exists.”

Hufbauer said that China’s government is now trying a range of tactics like credit rationing and other command-and-control measures to keep prices from rising. These policies are misguided and are unlikely to contain prices, though they may spur shortages and harm economic growth, he said.

The anti-inflation policies the government has followed both before and during the current crisis have only added to China’s troubles, Hufbauer said.

“This is a black eye for the leadership,” Hufbauer said. “And I’m sure they’re acutely aware of that.”

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


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