China May Impose Temporary Price Controls as Inflation Surges

China May Impose Price Controls as Inflation Surges
McDonald’s Corp. said today that it has increased prices for its burgers, drinks and snacks in China to offset costs. Photographer: Kevin Lee/Bloomberg

China may impose temporary price controls to counter the fastest inflation in two years, the cabinet said.

Price caps on “important daily necessities” and production materials will be used if necessary, the State Council said on its website today after a meeting chaired by Premier Wen Jiabao.

China’s accelerating inflation has sent stocks and commodities sliding on speculation that efforts to curb prices will cool the world’s fastest-growing major economy. The State Council’s announcement came after the Shanghai Composite Index today extended to 10 percent its decline from an almost seven-month high on Nov. 8.

“This is about the strongest signal the government could give of its determination to slow price rises,” said Mark Williams, a London-based economist at Capital Economics Ltd. and a former China adviser for the U.K. Treasury. “Whether or not controls end up being widely implemented, the government will hope that the mere fact of the announcement will help to rein in inflation expectations.”

The cabinet also pledged to stabilize natural gas prices, crack down on speculation in agricultural goods and ensure the supply of vegetables, grain, cooking oil and sugar. State television reported yesterday that the State Council was drafting measures to curb prices.

The MSCI Emerging Markets Index declined 1.1 percent to 1,088.83 as of 7:34 a.m. in New York, set for the lowest closing level since Oct. 1.

Costlier Burger

McDonald’s Corp., the world’s largest restaurant chain, said today that it has increased prices for its burgers, drinks and snacks in China to offset costs.

The central bank last month raised interest rates for the first time since 2007 as the government wrestles with inflation that accelerated to a 4.4 percent annual pace in October, mainly driven by food costs. Inflows of cash from trade and investors betting on Chinese growth and gains by the yuan threaten to fuel price gains.

Citigroup Inc. economist Ken Peng sees the central bank raising interest rates next month and said the government will also seek to limit credit growth after targeting 7.5 trillion yuan ($1.1 trillion) of new loans this year, 22 percent less than the record amount extended in 2009.

2008 Precedent

China in January 2008 temporarily froze prices for oil products, natural gas and electricity, as well as daily goods and school and transportation fees, to counter inflation that surged to the fastest pace in more than a decade. Shanghai’s stock index plunged in 2008 after peaking in October 2007.

“It’s feeling like the winter of 2007 all over again,” said Gavin Parry, managing director of Parry International Trading Ltd., a stock trading desk in Hong Kong. “The last time China enacted price controls, they ended the Shanghai bull market. The knock-on could be larger this time given the global focus on China.”

Shanghai’s benchmark index fell 1.9 percent today, after a 4 percent decline yesterday.

Today’s statement, which also said the government should seek to stop the illegal processing of corn and cotton, followed a report in the China Securities Journal yesterday that price limits were possible for food, and punishments could be strengthened for speculation in agricultural goods.

Vegetable Prices

Corn prices in China jumped to a record yesterday as tightening supplies increased their investment appeal. Rice also reached an all-time high. China has already sold sugar, cotton, corn, aluminum and zinc from stockpiles in an effort to ease shortages.

Vegetable prices in the first 10 days of this month jumped by 62.4 percent from a year earlier, the Financial News said yesterday, citing a survey of prices by the Ministry of Commerce.

The State Council highlighted the “importance and urgency” of tackling prices and said local governments could use subsidies to aid the poor.

October’s inflation rate was higher than any of the estimates in a Bloomberg News survey of economists. The government is also seeking to cool property prices after record annual gains this year.

McDonald’s product prices were raised by 0.5 yuan to 1 yuan (15 cents) at the more than 1,200 restaurants in the country because of higher raw-material costs, the company said today.

“It’s good that the government starts to take the inflation problem seriously, but it has not yet touched the root of the problem -- excess liquidity,” said Tao Dong, a Hong Kong-based economist at Credit Suisse Group AG.

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