Price rise sparks inflation concerns
By Xu Dashan (China Daily)
Updated: 2004-08-30 07:02

A number of economists are expressing concerns that the Beijing local government's decision to increase electricity prices will add to inflationary pressures and be too costly for many residents.

Although the city's development and reform commission will hold a public hearing on the planned price rise, previous experience suggests that this will have little impact.

A similar hearing took place in June to discuss a 30 per cent rise in the city's water rate, which took effect at the start of this month.

Beijing's price hikes are likely to be the first in a nationwide wave of rate rises for public utilities, said Qi Jingmei, an economist at the State Information Centre.

Local governments in other municipalities and provinces have also been considering increasing water and electricity rates, Qi said.

"There are big possibilities for them to raise prices, because these areas also suffer from water and electricity shortages," she said.

"If the price hike spreads across the nation, it will increase the likelihood of inflation - a major concern in the economic situation," she said.

Prices for services account for about 24 per cent of the entire consumer price index (CPI), policymakers' key inflation gauge, she added.

China's CPI rose 5.3 per cent year-on-year in July and 3.8 per cent in the first seven months, according to earlier figures from the National Bureau of Statistics.

Niu Li, another economist at the centre, said the government should adopt a cautious attitude towards further price rises, because inflationary pressures are already very large.

"While food prices remain at a higher level, international oil prices are rising rapidly," he said.

International oil prices have risen to as much as US$49 per barrel in the past two weeks.

"There are also signs that the raw material prices may have rebounded," he said.

Wang Zhao, a senior researcher at the State Council Development Research Centre, said bottlenecks in the supply of water and electricity were the reason that the government was considering the price rises.

"A price rise is also a good way to encourage people to conserve these resources," he said.

However, the price rise would undoubtedly have a certain negative impact on many residents, Wang said.

Higher prices mean that people have already suffered from a negative interest rate.

"A negative interest rate would mean that people lower their expectations for the future," she said.

She cited a recent survey by the central People's Bank of China as saying that public dissatisfaction about consumer prices was at its highest level since 1999.

A negative interest rate also causes bank deposits to shrink, she said. "This will make their purchasing power drop."

An average low-income urban family has to pay an extra 34.2 yuan (US$4.1) a month on food during the first five months of this year, due to a rise in the price of grain and related products such as eggs and meat. This extra expense accounted for 14.8 per cent of the average household monthly spending on food.

"Some low-income families have even begun to worry whether they will be able to pay for food and clothing," Qi said.

"Their health could also be affected, as they will only buy the cheapest products and pay scant regard to food quality."

The impact of the price rise was greater in rural areas, Qi said.

Although farmers' per capita cash income rose a year-on-year 16.1 per cent during the first half of this year, retail sales in rural areas grew by just 9.1 per cent. The growth rate was 5.6 percentage points lower than in urban areas.

"The government should not neglect ordinary people's feelings and interests when it makes any decisions about price hikes," she said.

It should also raise the renminbi interest rate to increase people's confidence in the future, she said.

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