Food for thought on Chinese price controls


chinaIn recent decades China has experienced unprecedented economic growth as the result of opening up their economy to free market forces. Recently, though, the inconsistencies in their domestic and economic policies have begun to show through, as inflation becomes a real issue.

The Chinese government’s response to the current food price crisis is most telling. It was announced this week that the government is to introduce food subsidies and may introduce price controls if the problem becomes worse. This is an indication that China’s economic policy is becoming as interventionist as its currency system and free speech stance.

China is currently experiencing double-digit food price inflation of around 10%. Though the general level of inflation is also rising, reaching 4.4% in October, it’s thought that this jump in food prices is the result of summer storms that damaged crops, reducing supply and causing food prices to rise. The problem of food inflation seems to have spiked in recent weeks, with the average wholesale price rising by nearly two thirds in the first 10 days of November. With poor families spending around half of their income on food, such a huge rise in prices has the potential to cause great unrest. The government has come to the conclusion that the only way to prevent this is to intervene in the market.

The problem for the Chinese government is that this approach will probably make things worse. Food price subsidies drive down prices by creating an oversupply and can create downward pressure on wages, which in the long run counters the original point of the subsidy. If the government goes further and introduces price controls, as it is predicted they will, the problem could get even worse. By keeping prices artificially low, demand increases to the point where supply cannot keep up, leading to – you guessed it – shortages of food. To make things worse, the price ceiling means that people who do have access to food don’t ration their consumption carefully. Though the Chinese government may see these policies as a short-term fix to a politically volatile situation, it will probably exacerbate things. That’s the thing about the free market – you can’t have your cake and control its price too.