If officials from any other country had told consumer products giant Unilever that it couldn’t raise prices for its goods, would the advice have been so readily accepted?
China’s National Development and Reform Commission (NDRC), which is accustomed to handing out directives, probably hasn’t spent much time pondering the point. Perhaps wisely, when it warned Unilever against price hikes earlier this month, the firm soon gave assurances that it would cooperate.
Regular readers of WiC will have noticed that the NDRC features regularly in these pages (it has got a mention in over a third of the our 103 issues, we calculate). There’s a good reason for that. The commission is one of the most powerful agencies in the Chinese government apparatus, with ministry-level rank under the State Council.
In many ways the NDRC is a first among equals, and has been accused by rival agencies of assuming the authority of a ‘mini-State Council’. It emerged less than 10 years ago, via a merger of two veteran commissions from the command economy era, and it continues to be tasked with more of a macro-overview of policy (it is responsible for implementing each new version of China’s five-year plans, for instance).
In fact, the shadowy nature of Chinese governance means tracing the full extent of NDRC power can be a challenge. On paper, its remit covers a wide area from the regulation of prices for electricity, fuel and water through to veto rights on major investment projects and bank loans. One example is in the push for further consolidation in industries like steel, aluminium and coal. The key reason why Wuhan Iron & Steel hasn’t been able to break ground on its planned steel project in Guangxi (see WiC100) is because the NDRC has forbidden it.
That can lead it into conflict with other government departments. The National Energy Commission and the Ministry of Industry and Information Technology have been keen for more of a say in energy pricing and major project approvals respectively. There have also been clashes with the central bank over bank lending thresholds (the NRDC has wanted higher limits than the PBoC).
Due to the nature of its work, the NDRC can also turn into more of a micro-manager, as it gets pulled from policymaking into the minutiae of more practical, day-to-day government.
And in the current policy environment that means that the NDRC is doing its highest-profile work in the struggle to contain inflation.
Understandably, companies are keen to stay on its good side, and its officials get a hearing when they request it. Several firms in recent weeks got the same message as Unilever, including brewers (Tsingtao and Budweiser) and snack makers (Master Kong and Want Want China). According to the Guangzhou Daily, seventeen industry associations have also been warned that price rises are “unwelcome”.
Longer term, will the NDRC continue to have such an influence? Proponents of China’s ‘mixed economy’ approach say it is only following a path credited with developing the economies of Taiwan, Japan and South Korea. But in terms of its latest efforts to dampen prices, the NDRC’s guiding role also has its critics. While acknowledging that the commission was responding to public opinion, financial commentator Ye Tan argued in the National Business Daily that price controls (first mentioned in WiC91) wouldn’t be handled sensibly. “Once the government gets addicted to using administrative means to control prices,” wrote Ye, “China’s market-price system will eventually revert back to the era of administrative control.”
Ye points out that attempts to control electricity prices have seen the five major power companies suffer $9 billion in losses over the last three years. “Now that the [NDRC] has ordered coal miners to keep prices low too, it will either have to bring down miners’ costs or pay them subsidies as well,” he warned, “thus the cycle of subsidies and price controls is endless.”
“Price controls can’t solve the inflation problem, they only hide it temporarily,” Caijing magazine agrees, suggesting instead that a reduction in value-added tax was a better first step.
© ChinTell Ltd. All rights reserved.
Sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.