China Begins Lifting Price Controls

PEKING--Chinese Premier Zhao Ziyang took the extraordinary step a few days ago of denouncing what he called “street gossip” that consumer prices are about to go up in China.

“Because of insufficient education and propaganda work and lack of information, street gossip groundlessly predicts price increases in grain and TV sets,” Zhao said in a New Year’s Day speech. “I believe that such gossip will disappear by this time next year.”

Zhao’s denunciation of “gossip”--which was reported in the Chinese press but left out of official English-language versions of his speech--shows the sensitivity of Chinese officials to the danger of inflation now as they attempt to reform the nation’s economic structure.

In the earliest days of 1985, Zhao and other high-ranking Chinese officials have made public the first details of how the regime intends to move the country toward a market-oriented economy.

Their statements show that the government intends to begin lifting price controls on some commodities this year but that it will proceed very cautiously, hoping to synchronize price increases with raises for workers and keeping a careful eye on public reaction.

The aim is to avoid widespread public resistance to price increases in essential products like food and housing, such as has occurred in other countries, Poland and Egypt among them.

China announced its general intention to change the nation’s pricing system last October in a far-reaching document approved by the Communist Party Central Committee. The party indicated that China should move from mandatory state planning and price controls to an economy in which prices are determined by the market forces of supply and demand.

Chinese leaders such as Zhao have said they hope the change will produce greater economic efficiency and thus help stimulate growth. In addition, the market reforms will reduce the state subsidies that have become an increasing burden upon China’s budget.

$6.6 Billion in State Subsidies

In recent years, China has been buying grain and other produce from farmers at prices far higher than their selling prices to consumers. According to figures recently published in a Shanghai economic newspaper, the state subsidies for grain, cooking oil, meat and eggs added up to about $6.6 billion in 1983.

Moreover, prices of coal and other energy supplies have also been kept artificially low in China. Because the government sold coal to industries at prices lower than the cost of production, the state-owned mines lost more than $310 million in 1983. Last fall, as soon as China’s top party and government leaders began talking about price reforms, residents of major cities such as Peking and Shanghai began rushing to buy food products and durable goods such as washing machines and television sets, fearing that prices for these items were about to go up.

Chinese officials quickly warned that they would punish any price gougers. Nevertheless, the prices of some goods in China have begun to creep up.

Just in the past two weeks, for example, the newsstand price of the Communist Party newspaper People’s Daily was raised from 7 fen (2.5 cents) to 10 fen (3.5 cents), and many other Chinese newspapers raised their prices from 4 to 5 fen.

The price of legal fees for a divorce, it was announced, will go up to at least 10 yuan ($3.60) from 5 yuan ($1.80).

In a series of moves over the past two weeks, Chinese leaders have served notice that they intend to begin the price reforms this year. Zhao, in fact, called the price changes “the key to the entire structural reform” (of China’s urban economy). Yet Chinese officials have also sought to assure the public that there will be no drastic impact on consumers.

Zhao announced New Year’s Day that China intends to “gradually abolish” the 3-decade-old system under which the state has the exclusive right to buy and sell major agricultural products. The prices of these products will be increasingly left to “market regulation,” he said.

In the same speech, he indicated that a number of Chinese intellectuals, including scientists, educators and school teachers, will get pay raises this year.

Gauge Impact of Price Adjustments

Vice Premier Tian Jiyun said this week that China plans to introduce many of the price adjustments in “small steps,” carefully gauging the impact of each change.

Specifically, Tian said the prices that farmers obtain for their products will soon change and so will the prices at which the state sells energy to industrial enterprises. But he said price changes for staples like grain, cooking oil and rent “will be postponed” for the time being.

Another high-ranking Chinese official, Minister of Light Industry Yang Bo, said last week that the prices of consumer goods such as bicycles, refrigerators and washing machines will remain stable through this year and that increased supplies will be on the market.

A foreign diplomat specializing in economic affairs warned the other day that it may not be possible for Chinese leaders to change the pricing system and please everybody at the same time.

For example, he said, if Chinese industries are charged higher prices for raw materials but are not allowed to increase costs for their finished products, then they will have less money for workers’ bonuses and for reinvestment. And if prices and wages go up in tandem, people on fixed incomes will still find themselves poorer.

“When you move from distorted energy prices to real ones, you cannot have your cake and eat it too,” this analyst said. “You cannot go through this process without some amount of pain. Some people will be hurt in the short run.”