Liao Yingmin

I. On the Current Price Situation

Since the beginning of this year, the residents’ consumer price index has ended nearly one year’s negative growth and has shown a trend of increasing month by month. The nation’s overall consumer price index for January-May registered an increase of 0.6 percent compared to the same period last year. The five months saw the residents’ consumer price index increase by 0.4 percent, 0.2 percent, 0.9 percent, 1.0 percent and 0.7 percent respectively. Meanwhile, prices of major production means rose sharply, with the growth rates of ex-factory prices for industrial goods and prices for raw materials purchase expanding continuously month after month. Regarding these price changes, people hold different views. Some believe that the economy is showing some signs of overheating, and will cause an excessively fast growth in price levels, even resulting in inflation. Others believe that the foundations for a price rebound is not yet solid and that the abrupt SARS epidemic will particularly exert powerful impacts on the economy and prices and may revert the country back to the shadow of deflation again. We believe that although current prices show a steady rising trend, there do not exist conditions for a rapid rise and occurrence of inflation. The abrupt SARS epidemic will only affect the level of price rebound but will not change the upward growing trend of prices. The government should continue to adopt measures to expand the domestic demand, promote the readjustment of the economic structure, prevent the development of SARS epidemic and maintain stable operation of the economy and prices.

II. Features of Current Market Price Operation and Related Causes

Currently, prices of major products are showing a trend of increase, demonstrating the following characteristics:

1. Residents’ Consumer prices have stopped decreasing and reverted to an upward spiral mainly because of the pull of prices of vegetables, services and public goods. Due to climatic reasons, vegetable prices in particular, soared by 34.7 percent during the first quarter. Vegetables brought about a 2.5 percent increase in prices of food products and 2.3 percent in service prices. Prices of other consumer products, such as tobacco, liquor, clothing, household appliances saw drops of various degrees. In April, prices of household appliances dropped by 4.3 percent, prices of Western medicines dropped by 5.5 percent, while prices of communications equipment and durable goods for cultural and entertainment use decreased by 18.3 percent and 7.5 percent respectively. After adjusting the incidental factors that lead to the rise of vegetable prices, the residents’ consumer price continued to be in negative growth.

2. The rise of prices for industrial goods mainly concentrates on the rapid increase of the prices of the important means of production. During the first quarter, ex-factory price of the mining industry as represented by the crude oil sector soared by 43.5 percent. The raw materials industry’s ex-factory price rose by 10.7 percent compared to the same period last year, which prompted the prices of production materials to rise by 5.5 percent during the first quarter, and further resulted in an increase of 3.6 percent of ex-factory prices for industrial goods and 4.6 percent for prices of raw materials procurement. In April and May, as a result of the end of the Iraq War, fall of crude oil prices and the impacts of SARS epidemic, prices of crude oil and steel products slowed down in rising, and prices for industrial goods rose by 3.5 percent and 2.0 percent respectively on an annual basis.

3. Prices of means of livelihood continued to be in negative growth yet its pace was slowing down month by month. Ex-factory prices of the means of livelihood have declined for 72 months successively. During the January-April period, monthly growth rates dropped by 1.6 percent, 1.3 percent, 1.2 percent and 1.2 percent on an annual basis. The decreasing momentum is diminishing, which means that the price decline is walking out of the ebb and will exert positive impacts on residents’ consumer product prices in future.

To sum up, the basic characteristics of the price operation are: firstly, prices of resource type products are rising substantially, followed by price rallies of raw materials; secondly, residents’ service prices are obviously rising and the price decreasing momentum of residents’ consumer product is slowing down.

Price is an overall reflection of the national economic operation. Price rebounds since the beginning of 2003 are the results of several years’ consecutive proactive fiscal policies, the expansion of domestic demand and the continuous deepening of reform and economic structural adjustment. The trends of prices mirror the features of the current economic operation.

Firstly, the rapid increase of overall demand is the major force driving the price levels on an upward spiral. During the January-April period, the whole society invested RMB 726.5 billion on fixed assets, an increase of 30.5 percent compared to the same period last year. The growth rate represents an increase of 3.4 percentage points from that of the same period last year. During the first quarter, the country’s retail sales volume of consumer goods rose by 9.2 percent (the growth rate was 7.7 percent because of impacts of the SARS epidemic in April). The development type of consumption as represented by housing, automobile and services has been initiated in an all-round way and brought about rapid increases in demand of housing, interior decoration materials, automobiles and telecommunications equipment. During the first quarter, China exported USD 86.3 billion worth of goods, up by 33.5 percent on a yearly basis. The growth rate marked an increase of 23.6 percentage points compared to that of the same period last year. Export of electromechanical products and high-tech products rose by 40.7 percent and 48.5 percent respectively. The rapid growth of the overall demand has brought along the rapid development of the national economy, which in turn boosted an overall demand.

Secondly, contradictions in supply and demand structures result in increases of demand and exert different pulling effects on prices. Due to reasons in fund, technology and social system, China’s industrial structure has always been imbalanced with light head and heavy feet. This shows that in agriculture, all agricultural products are oversupplied at a low quality level. In the area of industry, the structural problem shows that the processing industry especially the processing industry of ordinary consumer goods have an excessive production capacity. Energy and important raw materials and other infrastructure industries also lag behind in development. With such an economic structure, prices of food (mainly grain), which constitute a heavy component in the residents’ consumer price, will cease decreasing and tend to stabilize on a certain level because of pulling force of demand and an improved demand and supply structure. Food prices will not show a strong increase in the short term. In the area of industrial consumption goods, because of existence of excessive production capacity, the market is sharply competitive, and the increase in market demand will mainly result in growth of production but not in the rise of prices. It is a different situation as far as the means of production is concerned. Increase in consumer goods processing industry and in fixed assets investment will create more demand for energy and basic raw materials and lead to the change of the relationship between supply and demand. Because of the limited production capacity in basic industries, supplies of power, steel, chemical materials and other basic raw materials will not be able to meet demands in terms of quantity, types and specifications, resulting in varying degrees of increases in prices for these products.

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