BOSTON—China will struggle to pay the combined costs of subsidized food and fuel while trying to rebuild Sichuan, experts say. Yet, the government is maintaining its commitment to price controls even as reconstruction costs rise.
On May 28, China’s Ministry of Commerce reported progress in the country’s fight against inflation after farm produce prices fell 0.7 percent in medium-sized and large cities, marking the seventh weekly decline in a row.
But this decline made only a partial dent in the high costs of food, which climbed 22 percent by April from a year before.
In order to spur farmers to produce more without boosting prices, the government agreed in March to pay 25 billion yuan ($3.6 billion) in new subsidies on top of a 30 percent increase already budgeted for 2008. The State Council also added 95 billion yuan at the start of the year.
The government has also been keeping a freeze on fuel prices, forcing it to pay compensation to oil refiners. This week, state-owned Sinopec said it had received subsidies of over 7 billion yuan for April alone. So far this year, the government has paid nearly four times the amount it paid for all of 2007.
China’s State Council has meanwhile ordered an across-the-board budget cut of 5 percent to raise 70 billion yuan ($10 billion) for reconstruction. At the same time, the National Development and Reform Commission (NDRC) has ordered price controls on food, transport, and housing materials for the quake zone, which may spark demands for more subsidies.
In an interview with Radio Free Asia, Harvard University economist Dale Jorgenson said, “They can’t be doing all this simultaneously. It’s just going to make the situation worse and worse.”
“They’re in trouble, and that’s why they ought to gradually release the controls” and let prices rise, Jorgenson said.
Jorgenson said that earthquake relief and recovery must have the highest priority. But he also warned against the consequences if the government continues paying to keep consumer prices in check during the recovery period.
“This is really going to create a severe budgetary problem for them. And they’ve got to figure out some way to relieve it by eliminating some of these less necessary things, like these subsidies to food and fuel—especially fuel.”
These multiple pressures should prompt the government to reconsider its economic policies, Jorgenson said.
Mikkal Herberg, research director for the energy security program at the Seattle-based National Bureau of Asian Research, said that China’s government has fallen back on its traditional command structure to cope with both the earthquake and the economy.
“This is a political structure that’s always been driven heavily by administrative controls and state direction in a crisis,” he said. “When you have an earthquake, this is something the old system is well-suited for.”
But command-and-control policies are likely to prove useless in dealing with market forces of supply and demand, Herberg said.
“If you look at problems like what to do about higher food prices, higher fuel prices, and other things, this old administrative and market-control approach doesn’t work very well,” he said.
Herberg said that growing subsidies for food and fuel also make it harder for the government to establish rational economic policies.
“The subsidy problem gets bigger. Bills get bigger for all these things, and so the political and social costs become higher, and it’s more difficult to begin making those reforms.”
Original reporting by Michael Lelyveld. Edited for the Web by Richard Finney.