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Time for price reform

(China Daily)
Updated: 2008-08-07 16:24

The recent fall of international oil prices has lent credence to optimism about China's expectations on eased inflationary pressure.

Success in reining in runaway inflation will enable the government to focus more on keeping economic growth on track. Yet, more importantly, it will provide room for manoeuvre for policymakers to start pricing reforms necessary to achieve the country's energy-saving goals.

A week before the Chinese officials release consumer price index for July, many observers are predicting that the country's headline inflation will fall for the third consecutive month to lower than 7 percent.

As initial statistics indicated that major food prices either flattened or dipped last month due to increased supply, it looks rather likely that this round of food-led inflation might have peaked after hitting a 12-year-high of 8.7 percent in February.

When consumer inflation fell from 7.7 percent in May to 7.1 percent in June, a rapid rise of producer prices by 8.8 percent year on year in June, the fastest since 1999, had sparked worries that it may threaten to feed through into sustained higher levels of CPI.

Fortunately, after a bumper summer harvest, the fifth in a row, that helped stabilize domestic food prices, the recent fall of international oil prices also begins to ease China's inflationary pressure.

The rocketing crude prices had affected the Chinese economy greatly, as the nation relies on imports to meet nearly 50 percent of its oil demand. Now, oil has fallen to a three-month low from the mid-July peak above $147 a barrel as a result of a deteriorating global economy.

If international oil prices stop soaring, inflationary pressure on China's factory-gate prices will ease too, making it possible for the country to bring consumer inflation under firm control later this year. Under such circumstances, policymakers will be well positioned to fine-tune macroeconomic control to maintain stable and fast economic growth.

Nevertheless, eased inflationary pressure will also allow the government to reform the pricing mechanism for key energy products. Such pricing reforms may push up inflation for the moment, but it is far more costly to delay them.

Both the country's need to cut energy intensity by 20 percent between 2006 and 2010 and its sustainable development in the long run demand a market-led pricing system that can respond quickly to supply shortage while rewarding those who are able to make more efficient use of energy.