| SHANGHAI, July 16
SHANGHAI, July 16 Behind China's two
investigations into irregular pricing of infant formula and
pharmaceuticals announced this month is one powerful institution
and its struggle for relevance as Beijing attempts a transition
to a more consumption-led economy.
The investigations have entangled big foreign companies
including Danone SA, Nestle SA and
GlaxoSmithKline Plc. But some analysts say there may be
something deeper at work - jockeying over the direction of
policy in the world's second largest economy in the years ahead.
The National Development and Reform Commission (NDRC),
Beijing's economic superagency, sets policy for strategic
industries, approves big investments, mergers and acquisitions,
and has the authority to influence prices for everything from
liquor to gasoline.
Its powers are so sweeping that it is often called the
"little State Council".
But in recent months, as President Xi Jinping and Premier Li
Keqiang have begun an attempt to steer China's economy away from
its reliance on state-led investment towards a more
consumer-focused model, academics and even senior officials have
begun to publicly cast doubt on the NDRC's role.
While the NDRC has always had a price-setting role, its
decision to launch high profile predatory pricing probes into
infant formula and drugs now could be a bid by the commission to
prove its usefulness as a regulator.
"On a fundamental level, the NDRC is scrambling to show that
it has something to contribute," says Barry Naughton, professor
at the University of California, San Diego, and a specialist in
That the main economic policy body in the fastest-growing
major economy over the past decade might feel the need to shore
up its position says much about the debate raging among Chinese
policymakers. In key areas, the new leaders are trying to shift
China's priorities in ways that represent a challenge to the
NDRC's traditional dominance.
Evidence that dominance could be under threat includes the
fact that Premier Li made the reduction of bureaucratic
approvals - one of the NDRC's main roles - a key plank of his
reform plan announced in March.
In May, Li also rejected a 40 trillion yuan ($6.5 trillion)
urbanisation plan that the NDRC had proposed, sources familiar
with the matter told Reuters, although the commission denies
Xi and Li remain committed to urbanisation, but the push now
is "less about building stuff", says Arthur Kroeber, managing
director of GaveKal Dragonomics Research, and more about helping
migrants live "more fully-fledged urban lives".
Reducing bureaucratic red tape - such as the NDRC approvals
process - is another way the new administration would like to
shrink the role of the state in the economy.
There are also concerns among academics about the NDRC as an
institution. Founded in 1952 as the State Planning Commission,
it is deeply rooted in China's command economy past, even as it
crafts policies for its mostly capitalist present.
Part of the debate is about whether, through its investment
approval function, the NDRC is allocating resources as
efficiently as possible, says Shi Lei, professor of economics at
Fudan University. Overcapacity plagues many industries in China.
With so much power concentrated in one institution,
corruption is another worry - Liu Tienan, former NDRC vice
chairman, is under investigation over allegations he took bribes
to help a businessman defraud banks.
The NDRC is no stranger to controversy. It has faced
challenges to its power before and has found ways to survive and
even increase its influence.
Indeed, this month's drugs and formula investigations could
well be a sign that the NDRC is adapting to the new mood in
Beijing by strengthening its role as a regulator.
Especially since the 2011 introduction of regulations
governing its role in implementing the 2008 Anti-Monopoly Law,
the NDRC has been stepping up its investigations into pricing
In March, it imposed a 449 million yuan fine on two domestic
liquor firms for setting minimum resale prices and a 10 million
yuan fine on eight real estate companies for misleading
customers and violating pricing regulations.
In January, it found six foreign LCD manufacturers guilty of
price fixing and fined them 353 million yuan.
Few sectors pack the symbolic punch of infant formula, both
for Chinese consumers and the government. Since 2008, when
melamine in infant formula killed six babies and sickened
300,000 others, the infant formula industry has epitomized the
trade-off between rapid economic growth and health and safety.
Driving down prices also supports Beijing's efforts to shift
the economy away from a reliance on exports and investment
toward a greater dependence on consumption. Drugs and infant
formula are both commonly perceived as too expensive.
"Every time price reductions are made, it's mainly a public
relations exercise," said Zhou Zhang, an analyst at China
Merchant Securities. "The NDRC trumpets how big reductions will
be, but when it comes down to it, prices only fall a bit. The
NDRC's main consideration is public relations."
The NDRC did not respond to a request for comment. One
person with knowledge of the NDRC investigations said that they
were being conducted at an unusually rapid pace.
The infant formula investigation also appears to cover not
collusion among companies, but how the retail prices for these
products are set - an issue where China's laws differ from those
in other countries, including the United States.
All of the infant formula companies targeted have reduced
prices in China since the NDRC announced its investigation.
That might be good for consumers in the short term, but
Scott Kennedy, director of the Research Center for Chinese
Politics & Business at Indiana University, questioned the NDRC's
credentials as a consumer watchdog, given its central role in
China's export- and investment-led expansion of the past two
"This is an economy built by, for and of industry," he said.