By Feng Fei, Shi Yaodong, Deng Yusong, Wang Xiaoming, Wang Jinzhao & Song Zifeng, Research Department of Industrial Economy & Institute of Market Economy of DRC

Research Report No 122, 2013 (Total 4371)

The deep-seated problems confronting China's price reform have remained for many years, and the distorted factor prices have led to irrational resource allocation, unbalanced structure and an extensive mode of development. To solve such long-standing problems as adjustment instead of reform, distorted price relations, and incomplete price structure and price supervision mechanism, the State, in a period to come, should clarify the reform master plan of "upholding one direction and improving two mechanisms", which means to maintain the direction of reform for market economy and let the supply-demand relationship play a basic and leading role in deciding the market price; and improve the pricing mechanism so that the price signals can truly reflect the resource scarcity, supply-demand relationship and cost of environment damage and improve the price supervision mechanism to put the government-priced monopoly links under effective supervision, strengthen the independence and capacity of the supervision institution and combat the price manipulation and fraud in competitive areas.

I. Prominent Problems Confronting China's Price Reform

The number of products and services whose prices are under the direct intervention of the government has significantly dropped, instead, the control over the price of the majority of commercial products and services has been uplifted. However, the market-based pricing mechanisms for products and factors vital to the national economy and people's livelihood have not taken shape yet. The recent years have witnessed progress in the price reform in such areas, but in general, the country has failed to completely solve the deep-rooted problems. Impropriate control and administration measures and distorted factor prices lead to irrational resource allocation, unbalanced structure and an extensive mode of development.

1. Improper guidelines lead to replacement of reform with adjustment

The essence of the price reform is to reform the irrational pricing mechanism and enable the supply-demand relationship to determine the market price, so as to guide the production and consumption behaviors. The failure to make substantial progress in the price reform in energy and other areas (the price adjustment, to be more specific) should be essentially attributed to improper guidelines to replace reform with adjustment, namely, to ease long-standing contradiction between supply and demand and between the upstream and the downstream enterprises through short-term regulated price and adjusted price; for example, the reform of prices of coal for power generation, processed oil, natural gas and other products is conducted by following such a guideline. Restrictions on interest rate dampen the motivation of bank transformation, intensify the fund circulation beyond the system and thus increase the risks in the financial market. Due to direct government pricing, the government is confronted with problems which should have been solved by the market, and is forced to drive the rigid price increase; and a price adjustment mechanism is formed, under which the government has to promote the rigid price increase, rather than an innovative mechanism giving play to the price mechanism and encouraging enterprises to cut cost.

2. Price of some energy resources higher than that of USA and other countries due to the long-standing price relations distortion

Blocked price conduction between upstream and downstream enterprises and irrational price relationship of major energy products, especially the price between the coal and electricity, crude and processed oil, electricity for industrial and commercial use and for residential use, and natural gas and oil, have caused reverse adjustment of the price leverage, which impedes the improvement of energy and transportation structure and dampens the industrial competitiveness. In light of the fact that the United States is rejuvenating its manufacturing sector and attracting its overseas investment back by taking advantage of the low-cost energy, high attention should be given to the influence of energy price on China's international competitiveness.

3. Incomplete price composition impeding the sustainable social and economic development

Damage to the ecological environment caused in the process of energy resources development and production has not been fully calculated into cost, and the mine and water price has not fully reflected the resource scarcity and cost of environmental restoration. For example, the current coal price does not reflect the true value of coal, fees for exercising the right for prospecting and mining are too low to fully reflect the coal scarcity and sufficiently mirror industrial safety and other internal cost and such external cost as influence on the eco-environment; besides, it cannot tell the coal mine withdraw cost and expenditure and pays no attention to intergenerational equality, thus impeding the sustainable economic and social development.

4. Incomplete price supervision mechanism and hearing system

On the one hand, the government's dependent supervision function leads to insufficient supervision capability. The competent price management departments are also responsible for macro regulation and adjustment, and their price supervision function is usually subject to the macro-regulation and adjustment function; therefore, such departments are in a dilemma when reforming the pricing mechanism. While performing the supervision function, a mechanism is absent to collect real cost information of the monopoly links and give relevant feedback; and the prices supervision departments are bothered by insufficient human, material and financial resources. On the other hand, the social supervision mechanism is incomplete. Take the hearing system for example. The transparency and justice of China's price hearing system should be further improved, and it has become a common sense that hearings could lead to nothing but hiking prices.

II. Master Approach and Basic Principles for Deepening Price Reform

New approaches and mechanisms are a must for making new breakthrough in promoting the price reform and improving the price supervision.

1. Master approach

The master approach to deepen the price reform in China in a period to come can be summarized as "upholding one direction and improving two mechanisms".

Upholding one direction: we should uphold the direction towards a mechanism of forming the price leverage via the market, and enable the supply-demand relationship to play a basic and leading role in deciding the price, and reduce as much as possible the scope and degree of government's setting and intervening the price. The major target of the price reform is the pricing mechanism, rather than price adjustment, and the ultimate goal is to make the market maximally play its role, so that the price can precisely and effectively reflect the supply-demand relationship.

Improving two mechanisms: first, we should improve the pricing mechanism and particularly address problems like distorted energy prices, irrational price relation and incomplete composition on the basis of full and precise reflection of the resource scarcity, supply-demand relationship and external cost of environment damage; second, we should improve the price supervision mechanism to effectively supervise the government-set price in monopoly links (such as the power grid and natural gas pipeline network), intensify the independence and capability of supervision departments and combat price manipulation and fraud as well as other improper behaviors in competitive areas.

China's price reform is embracing two "window periods". First, some energy resources are more expensive than those in the United States and some other countries, but are cheaper than those in most European countries and Japan; and second, the global energy demand is dampened by the financial crisis. China should seize such opportunities and be determined to reform its pricing mechanism; otherwise, it will face more difficulties and higher cost.

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