November 16, 2010 / 4:01 AM / 7 years ago

China readies price controls to tackle food inflation

4 Min Read

By Kevin Yao and Aileen Wang

BEIJING (Reuters) - China will unveil food price controls and crack down on speculation in agricultural commodities to contain inflationary pressure that its central bank governor highlighted as a risk on Tuesday.

With consumer prices rising at their fastest pace in more than two years, the National Development and Reform Commission, the country's top planning agency, is preparing a "one-two punch" of actions to rein in food costs, official media reported.

Such direct intervention would mark an escalation of the government's efforts to tame inflation and underline its worries over the rapid run-up in food prices.

Possible steps include price controls, subsidies for shoppers, a crackdown on hoarding and price gouging as well as a system whereby mayors are made responsible for a basket of food items, the China Securities Journal reported.

Those found speculating on corn or cotton will also be punished severely, it added.

"Price increases, particularly overly rapid food price increases, are the main economic problem faced by the country at present," the report cited an unidentified source as saying.

"The policies that are being considered aim to contain the momentum and will be delivered in combination as a one-two punch," it added.

Consumer price inflation sped to a 25-month high in October, with prices rising 4.4 percent from a year earlier. Food, which makes up about a third of China's consumer price index, led the way, climbing 10.1 percent. Non-food items increased just 1.6 percent.

However, unlike past bouts of food inflation in China, there have been no major droughts or diseases to drive up prices this year. Instead, fast money growth appears to be the primary culprit.

At a regular briefing on Tuesday, the commerce ministry pointed its finger at factors beyond China's borders.

"Imported inflationary pressure has contributed to the big rise in China's food prices. Global prices of grains, cotton and edible oil have been rising noticeably," spokesman Yao Jian said.

China used food price controls to limited effect when inflation flared up at the end of 2007. With market forces dominant in the agricultural sector, the government struggles to steer the cost of food, though the announcement of controls can help to anchor inflationary expectations.

Watching Prices

China's economy is growing in line with the government's road map, but price rises are a concern, central bank chief Zhou Xiaochuan said on Tuesday.

"Upward pressure on prices needs to be watched. We will continue to maintain appropriate growth of money and credit," he said.

Zhou said that a two-speed global recovery posed complex challenges.

"Recovery in developed economies is slow. Monetary conditions are loose," Zhou told a forum. "Growth of emerging market economies is accelerating but they face capital inflows."

Chinese officials have warned that loose monetary policy in developed economies -- and, in particular, a new round of quantitative easing in the United States -- could send waves of cash toward its borders, compounding its inflationary problem.

Although China has a comprehensive system of capital controls, hot money can still work its way into the country through normal trade and investment channels.

Yao, the commerce ministry spokesman, warned that Beijing would ferret out any speculative inflows disguised as foreign direct investment.

Judging by the numbers, though, there is little evidence so far of that kind of illicit investment.

China drew $7.7 billion of foreign direct investment in October, about $500 million less than its monthly average in the first three quarters.

Writing by Simon Rabinovitch; Editing by Neil Fullick

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