By Michael Lelyveld
China’s government is battling back against a surge of inflation with new reporting rules designed to discourage commodity price hikes.
On June 17, the government’s top planning agency issued the new rules to “standardize behaviors such as price index compilation as well as information transparency and disclosure,” the official English-language China Daily reported.
The rules will take effect on Aug. 1, the National Development and Reform Commission (NDRC) said.
While the full extent of the reporting requirements remains cloudy, the motivation behind the government’s strategy seems clear.
Compilers of China’s mostly-private commodity price indexes will have to proceed carefully before reporting big increases, such as those for crude oil, liquefied natural gas (LNG), iron ore, copper and coal over the past several months.
“According to the regulation, authorities can conduct compliance reviews and take disciplinary measures for non- compliance,” the NDRC said.
News of the new rules was announced a little over a week after the National Bureau of Statistics (NBS) reported that the producer price index (PPI) jumped 9 percent in May from a year earlier, marking its biggest monthly increase since 2008.
The government has been pulling out all the stops to keep rising commodity costs from spilling over from factory gate prices into the consumer market as economic recovery from the COVID-19 pandemic spurs raw material demand.
So far, the government has been only partly successful in preventing producers from passing on their higher costs to the retail market.
The consumer price index (CPI) for May climbed 1.3 percent, rising from 0.9 percent in April. But the more moderate growth was largely due to declining pork prices as farmers rushed to sell hogs on news of African swine fever outbreaks.
The NDRC now seems to be attacking the commodity price bubble on several fronts at once, hoping to blunt a larger spike in the CPI reading for June.
In early June, Bloomberg News cited a “near-constant barrage of rhetoric and administrative measures to rein in the commodities surge.”
“Officials have raised transaction fees, changed tax rules, censored industry research, urged producers to sell inventories, cajoled trading firms to cut bullish wagers, vowed to clamp down on ‘malicious’ speculators and more,” Bloomberg said.
The new rules appear to be an attempt to head off price pressure by starving it of market information.
State media reports have described the new restrictions as a matter of transparency, suggesting that higher prices have resulted from conflicts of interest.
Publishers of price indexes “should be independent of the direct stakeholders in the commodity and service markets covered by the index.” Relevant information on the providers should be “fully disclosed,” China Daily said.
Aside from transparency, some of the rules imply that pricing activity in commodity markets should be restrained. The Communist Party-affiliated Global Times said the measure is “aimed at standardizing market prices.”
“To ensure the price index reflects the true market conditions, the price index named under ‘China’ and ‘state’ must provide the proportion of market transaction scale where the data is collected in the national market so that the sample data can effectively reflect the market prices of the whole country,” the paper said.
The rules on information control follow a pattern first cited by Reuters on May 12 in the coal industry, where a sudden price spike led to suspension of daily reports by three leading indexes. The decision to cease publication was portrayed as an industry initiative.
“Due to persistent and abnormal fluctuations in thermal coal markets recently, in order to stabilize market prices … (we) decided to suspend publication of the reference prices,” said a statement by the China Coal Transportation and Distribution Association.
The withholding of market information is one of several strategies for dealing with recent price increases in the coal industry.
On June 18, Reuters reported that the NDRC and the state market regulator had launched an investigation of coal prices and a crackdown on speculation. Inspections have been conducted at major coal ports, and suppliers have been warned against hoarding, state media said.
While the government’s statements cite transparency, the intent is to exert more control over the market.
But Derek Scissors, an Asia economist and resident scholar at the American Enterprise Institute in Washington, argued that the focus of the new rules is “strengthening their control over price reporting,” with emphasis on the reporting.
“Yes, that will have an impact on actual prices, but the primary goal is that the government can more easily report price stability when it wants to,” Scissors said.
Scissors argued that “there are better ways to impose soft price controls,” such as daily or weekly trading limits.
“You can later lift those, while this is a play for indefinite control over price indices,” he said.
On June 27, the NDRC issued a statement on the coal market, reported by the Global Times the next day.
The agency said that “there was no basis for a significant price hike for coal.” Prices were likely to come down in July with more hydropower and solar power production along with other measures to increase supplies, the NDRC said.
The statement could be taken two ways, either as an assurance to the market that relief was on the way, or as a warning to traders that further price increases are unjustified and would not be tolerated.
At least one instance of a suspected crackdown on market indexes has already been reported, sending a message that seems likely to intimidate index operators.
In May, Reuters reported that a previously reliable agricultural data provider for grains and oilseeds had suddenly stopped publishing without explanation on April 29.
The Beijing-based consultancy Cofeed was China’s leading source of pricing and inventory information for soybeans and other commodities. After repeated attempts to contact the company, Reuters found that their offices had been sealed by police.
Cofeed “is believed to have fallen foul of authorities,” Reuters said on June 17.
“Independent analysts who report on China’s grains industry have reportedly been arrested and their online businesses shut down to stop them from telling the truth about the country’s below average crop,” said Australia’s ABC News.
China has had bitter experience with bouts of inflation and non-market measures.
The country suffered double-digit price spikes in 1988- 1989 and again in 1994 with more moderate increases in 2007- 2008 and 2011, but consumer prices have been relatively stable since then.
China’s government threatened to take serious steps to control market prices in January 2008 after inflation hit 4.8 percent in 2007, the highest rate in the previous 11 years.
Despite mounting criticism of its non-market policies, the cabinet-level State Council ordered a freeze on prices for fuel, utilities and transport costs. A week later, the NDRC announced a series of price controls on food and consumer goods.
During the 2008 crisis, the government’s enforcement proved to be spotty as critics warned that rigid controls would only lead to hoarding, shortages and black market activity.
One month after the controls were announced, consumer inflation jumped to 8.7 percent. Prices for the full year rose 5.9 percent before falling 0.7 percent in 2009, according to data from the International Monetary Fund.