(Agencies)
Updated: 2008-01-18 19:27

China said on Thursday that its newly introduced price controls will not distort the economy but analysts warned that sustained interference could result in shortages and a black market.

China this week unveiled planned economy-style curbs on prices for a range of goods from instant noodles to milk in what it describes as temporary intervention to battle surging inflation.

The government has long set prices of oil and electricity -- and has pledged to freeze them at current levels -- but economists say this is the first time in more than a decade that Beijing has waded into the food market with such a heavy hand.

"The government has never asked and will not ask companies to operate while making losses," Zhou Wangjun, a pricing official in the National Development and Reform Commission, said on Thursday in an interview published on the government website.

"The government intervention will not distort normal business activities," he said. Leaving aside the new controls, the NDRC calculates that the government sets the prices of just 5 percent of all goods in the economy.

Annual consumer inflation hit an 11-year high of 6.9 percent in November, alarming officials who have said that stabilizing prices is a key target in 2008.

All major producers and retailers of flour, rice, noodles, cooking oil, milk and liquefied petroleum gas must notify authorities within 24 hours of any one-off price rise of more than 4 percent, the NDRC has ruled.

Dong Tao, China economist at Credit Suisse in Hong Kong, said the highly unusual move could only serve as a temporary brake on inflation before pressures bubble to the surface.

"It's very difficult to have partial capitalism and partial socialism," he said. "Market mechanisms will eventually kick in and a shortage economy will force the government to make adjustments later."

Tao gave the example of restaurants in Lanzhou, a city in western China, which were forced to cap the price of noodles last year and responded by cutting back on portion size.

ENFORCEMENT

Other economists expressed doubts about whether the restrictions would be enforced in the first place, as central authorities often have difficulty prevailing on local officials spread across the vast country.

"Responsibility for monitoring these pricing arrangements and for making sure the public doesn't get overcharged is being put in the hands of people and agencies that do not have a good record of carrying out such policies," said Thomas Rawski, a Chinese economics specialist at the University of Pittsburgh.

Nationwide firms such as Uni-President China Holding Ltd (0220.HK), a big instant noodle maker; Luhua Group, an edible oil heavyweight; and major dairy forms Inner Mongolia Yili Industrial Group (600887.SS) and Mengniu Dairy (2319.HK) need to get the nod from the NDRC itself before raising prices.

Cao Changqing, the pricing department's head, said the measures are intended to soothe fears and break the cycle of market behavior that he blamed in part for driving up inflation.

"If a supplier anticipated further price rises, he would reduce sales and hold back his goods from the market," Cao said. "And if a consumer anticipated further price rises, he would increase his purchases."