Cushioning the impact of price controls

The fast fall in vegetable prices must be what Chinese policymakers have long anticipated in their fight against soaring consumer inflation. But sadly, as the recent suicide of a cabbage grower Han Jin in Shandong province shows, it is proving too dear for many Chinese farmers.

The Ministry of Commerce and the Ministry of Agriculture are right to take immediate action to help farmers facing an oversupply of vegetables.

Nevertheless, the country’s pricing authorities should have all the price intervention measures reviewed in line with their actual or potential impact.

Accelerating price gains have justified the Chinese government’s all-out efforts to keep consumer inflation under control.

As consumer inflation jumped to a 32-month high of 5.4 percent in March, the country’s pricing authorities have stepped in more frequently than ever to stop some enterprises from raising prices. Since food still accounts for about one third of the basket of goods used to calculate China’s consumer price index, it is no wonder that Chinese policymakers have worked hard to prevent the prices of food staples from rocketing through the roof.

Given the close link between food prices and the cost of living for urban residents, administrative restraints on food prices have ostensibly played a big role in easing inflationary pressures in cities.

Unfortunately, while fixated on ensuring urban price stability, Chinese policymakers have failed to display a good grasp of the possible consequences of such price controls on the numerous farmers at the other end of the value chain.

Some farmers have been throwing away vegetables after prices plunged when vegetables in North China ripened early to join a market already saturated with vegetables from southern China.

Had there not been intensive administrative measures to stabilize urban markets, the misfortune of these farmers might have been only a pitiful story of bad timing. After all, lack of proper market information has been a long-standing problem for Chinese farmers who make a living at the mercy of weather.

However, things are quite different when the oversupply of vegetables comes at a moment when the pricing authorities are openly intervening in consumer prices to depress inflationary expectations.

If the current decline in vegetable prices is a necessary price that the country has to pay to battle inflation, it is not fair to leave farmers alone to bear most, if not all, of the cost that such downward price adjustments incur.

Local governments’ attempts to urge supermarkets, schools and company canteens to buy more vegetables is only a stopgap response.

With ballooning national coffers, the government should make use of the wherewithal it has to better and timely cushion farmers and other poor households against the undesired consequences the fight against inflation brings about in one form or another.

(China Daily, April 26)