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Chinese Consumers See Inflation Easing Government May Lift Price Controls BUSINESS ASIA By Bloomberg

Posted on: Tuesday, 13 December 2005, 12:00 CST

By Nerys Avery

Consumer prices in China fell 0.3 percent in November from October, the first monthly drop since July, the government said Monday, as the cost of manufactured goods fell, giving the government room to ease pricing controls on fuel and electricity.

Consumer prices rose 1.3 percent from a year earlier, compared with a 1.2 percent annual rise in October, the National Bureau of Statistics said in Beijing.

Prime Minister Wen Jiabao is taking advantage of inflation that is near a two-year low to lift government price controls after a jump in crude oil prices eroded profits at oil refiners and utilities. Prices of cars, mobile phones and clothes are sliding as excess capacity prompts manufacturers to offer discounts.

"Low inflation will provide a window of opportunity for the government to liberalize price controls," said Qu Hongbin, chief China economist at HSBC Holdings in Hong Kong. "I don't see a meaningful rebound" in inflation.

Year-on-year price gains have not topped 2 percent since April, and in September touched 0.9 percent, the slowest pace in more than two years. Factory price increases slowed to their lowest in two years last month, a Dec. 9 report showed, indicating that manufacturers may be under less pressure to charge more for their products.

Clothes prices fell 1.2 percent in November, while consumer durables slid 0.3 percent.

China lifted gasoline prices in July for the fifth time this year and electricity charges were raised in May. Prices may advance more as the government encourages consumers to curb waste, and seeks to fund investment in water and environmental projects. The northern port city of Tianjin raised water prices by as much as 27 percent starting Dec. 1, the official Xinhua news agency reported on Nov. 28.

The government controls retail prices of fuel, electricity and water. Wen has sought to raise charges at a gradual pace to avoid hurting farmers and low-income workers in cities.

China's refiners cut supplies to domestic users and increased exports in the second quarter because they could not pass on higher crude oil costs. The refiners' action led to fuel shortages and rationing in southern China.

Price controls have hurt profits of companies including China Petroleum & Chemical, Asia's biggest refiner. The company had a loss of 6.6 billion yuan, or $817 million, at its refining business in the third quarter, it said on Oct. 28.

Prices of fuel and vehicle spare parts rose 10.4 percent last month from a year earlier after gaining 10.6 percent in October, Monday's report said. Utilities charges climbed 7.1 percent, while urban transport prices increased 4.6 percent.

Vegetable prices jumped 22 percent, compared with a 17.5 percent increase the month before. Vegetable prices rose because heavy rains in the eastern part of the country damaged crops.

The costs of other foods are sliding. Grain prices fell 0.1 percent from a year earlier and meat priced dropped 6.3 percent, Monday's report showed. Costs of edible oils and fats slumped 7.6 percent.

Overall food prices, which account for about a third of the consumer price index, rose 1.6 percent from a year earlier after gaining 1.3 percent in October, driven higher by the surge in vegetable costs.

"Last year, food price inflation was 38 percent and this year it's only 1.6 percent, so that's the one variable that has given the government a lot of room to liberalize prices," said Hong Liang, an economist at Goldman Sachs Group in Hong Kong.

China will impose "moderate" and "selective" price increases next year, "taking into account the ability of the masses to bear" the costs, Zhang Ping, deputy director of the National Development and Reform Commission, the nation's top economic planning agency, told a meeting of local pricing bureaus on Dec. 4.

Clothing costs have fallen every month since 1999 and prices of consumer durables such as cars and mobile phones have slid every month this year as surplus capacity and intensifying competition have forced companies to cut prices.

China, the world's third-largest automaker, has the capacity to produce 2 million more vehicles than it needs, the National Development and Reform Commission said in a Dec. 3 report.

Volkswagen, Europe's largest carmaker, in August reduced prices on 18 models made by its Shanghai venture after losing market share in China to General Motors and Toyota Motor.

Source: International Herald Tribune

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