2008-02-25 (Xinhua) -Disruptions caused by severe weather have sparked anticipation of further price hikes in China, but retired teacher Li Xitian, who lives on a monthly pension equivalent to about 206 U.S. dollars, says he thinks the problem will pass -- and he's seen worse.

Eyeing prices of pork and edible oil at a Merry Mart in southern Beijing, the 77-year-old wasn't in a rush to buy. "I do feel it's more expensive to live these days. But hasn't there been unusually bad weather in the south? The price hikes will be only temporary, I think," he said.

China's consumer price index (CPI) retouched an 11-year monthly high with a 7.1-percent rise in January. The CPI rose 4.8 percent in 2007, also the highest since at least 1997. In 1988, however, retail prices, the official measure for inflation before 1994, rocketed by 18.8 percent year-on-year.

Current inflation figures should be put into perspective when making longer-term historical comparisons or looking at 'record' levels. Since 1978, when modern economic reform began, China has measured inflation in different ways and at different intervals.

Before 1994, for example, retail prices were the same as inflation for statistical purposes, and they were calculated by using three categories: state-listed prices, negotiated prices and prices at country fairs. These fairs were an early step in the de-control of farm prices. They allowed farmers to sell directly to the public at rural markets.

Today, retail prices include many items that aren't in the CPI, such as publications, office products and cosmetics. Prices are also calculated monthly, which can make inflation figures more volatile in the short term than when they were measured quarterly, which was the case during much of the 1970s, 80s and 90s. And fewer prices are set officially and directly by the state, although 'guidance' to industries hasn't disappeared.

Looking at the inflation figures since the reform era began 30 years ago, it's apparent that several price spikes, some in the double digits, accompanied stages in state de-control. There were even two bouts of deflation, one of which took place in just such a period. This was in 2002, when prices fell 0.8 percent amid a restructuring of state-owned enterprises in which many Chinese lost their jobs and cut their spending. The other bout of deflation was in 1998-99 amid the Asia crisis.

Li can remember the time, 20 years ago, when the government proclaimed "palpable inflation" in its national annual economic communiques for the first time since the founding of the new China in 1949. The former teacher at Qiantun Middle School in Xianghe County in Hebei Province, which is next to Beijing, recalls panic buying.

"People stood in long queues to snap up food, clothes and other daily necessities, but most of them would only end up with rumpled Renminbi in hand," he said. "It was an era of shortages."

Shortages still occur, but the government has defined the current bout of inflation, triggered mainly by pork and edible oil shortages, as "structural" and employed a variety of measures including price freezes, subsidies, tariffs, and interest rate and reserve requirement ratio hikes to ease supply constraints.

That's not to say that there isn't public concern. Government-sponsored Xinhuanet.com released an opinion poll on Wednesday, which indicated that prices were the "topic of most concern" of Chinese netizens in relation to the upcoming annual legislative conference due to open in early March. The other issues that interested the public most were housing, medical reform and social security.

"Price stability is a primary concern of many central banks and governments. But for China, where a yawning wealth gap accompanies public grumbles over unreasonable pricing in near-monopoly conditions in some sectors, prices are more than a sensitive economic issue," said researcher Wen Guifang of the Institute of Finance and Trade Economics of the Chinese Academy of Social Sciences.

IT'S 'DIFFERENT THIS TIME'

Inflation is little more than an idea to most Chinese below the age of about 30. This post-economic-reform generation has seen little genuine economic hardship since they reached adulthood. The country has achieved double-digit growth coupled with low prices since 1997.

"This ongoing [round of] inflation that surfaced last spring differs from the previous ones experienced by the Chinese since 1978. To cope with it, the public should stay on top of its causes and learn to accept the reasonable," Wen said.

"Price fluctuations" were the most frequently identified economic problem in the first two decades of economic reforms, as the National Bureau of Statistics (NBS) revealed in its annual economic communiques.

Apart from the 1988 period of "palpable inflation", another two noticeable price spikes noted by decision markers were in 1985 and 1994, when retail prices registered year-on-year rises of 8.8 percent and 24.1 percent, respectively.

"The three crests expressed, to some extent, the country's uneven road of economic reform, especially in easing of price controls," Wen said.

After the government took a small step of allowing price mark-ups for only excess farm produce in 1979, and then left the pricing for primary products, mostly farm produce and mineral resources, to market forces in 1984, dramatic price rises -- what academics called "a rational regression from the long-repressed prices to the real value of commodities" -- were recorded in 1985.

Year-on-year growth in retail prices stayed mostly below 2.8 percent between 1979 and 1985. In the 1978 economic communique, there was only a bare mention of price, which said that price changes had "continuously maintained stable".

Subsequent moves to ease the pricing rights for daily commodities since 1985 have spurred production, which hasn't necessarily kept pace with the explosion of demand and aggravated supply-demand imbalances.

In unprecedented harsh, frank language, the NBS communique summarized the 1988 domestic market as a situation characterized by "chaos of arbitrary price hikes and conspicuous illegal operation, featured by several scare purchases."

That was the year Li spoke of when he recalled queues of panic buyers.

China's economic reform mastermind, the late Deng Xiaoping, had called on the country to break through the barrier of pricing reform in 1988. But after prices surged, what came instead was there-centralization of pricing rights and a three-year-long campaign against profiteering.

"Many Chinese regarded price stability as [proof of] the superiority of socialism. Surging prices accompanied by chronic supply shortages and rampant profiteering gave many people a rude shock. A direct aftermath of the inflation was the stagnation of price reform," said Wen.

The proportion of urban households that reported a fall in their real incomes hit nearly 35 percent in 1989, compared with 21 percent in 1987 and "only a few" in 1986, NBS reports showed. The re-imposition of price controls drove retail prices down, certainly. Inflation fell from the double-digit levels to 3.1 percent in 1990.

The reverse wasn't without consequences. Many companies said that they were losing money; some even went bankrupt, a relatively new concept in China's modern era.

China re-accelerated pricing reform in 1992 after Deng paid a landmark visit to southern China, giving renewed impetus to economic reform. By 1994, when consumer prices rose by a record 24.1 percent year-on-year, the government retained pricing rights to only 10 percent of retail products.

Attributing inflation to excessive growth of demand and money supply, disaster-related output declines of some farm produce and administrative price adjustments, the authorities adopted a "moderately tight" fiscal policy and reined in monetary supply in 1995. This effectively brought inflation down to 8.3 percent in 1996.

Many analysts believe that the "roller-coaster" described above was a unique Chinese phenomenon related to the country's unique economic reform. But it remains an open question whether China could triumph again in the new inflation front line.

NEW CHALLENGES

The causes of inflation can vary. With excess liquidity from a massive trade surplus a relatively new issue, and a local economy increasingly integrated with the world, China's central bank must deal with imported inflation, experts say.

"Stimulating domestic consumption could be a 'remedy worse than the disease' as seen in 1988, when the whole country was ravaged by supply shortages," Wen said.

Another change that makes a big difference is the fiscal picture. The central government's revenue shot to more than 700 billion U.S. dollars last year from a paltry 33 billion U.S. dollars in 1988. These revenues allow the government to provide heavy subsidies to the worst-affected, low-income families and stimulate supply. The question, experts say, is whether it should so do and how much.

The ripple effects of global price rises are far more serious now than they would have been decades ago, as China's consumption of imported raw materials has soared. One factor in today's inflation surge, for example, has been world soybean prices.

What aggravates the situation is the triple threat of weakening global growth, possible domestic overheating and the catastrophic impact of recent severe weather.

Critics of China's policies include some influential domestic voices. Regarding tightening policies, for example, macroeconomic analyst Wang Jian, of the National Development Reform Commission, said that China might face "stagflation", which is inflation combined with economic stagnation. Similar concerns are currently being raised about the United States.

Economist Jonathan Anderson of UBS disagreed, saying there was no need for emergency anti-inflation measures, as all of the increase in headline CPI in 2007 came from food, and nearly all of those pressures in turn had come from meat and egg prices.

 "This is hardly a picture of widespread spiraling inflation," he said. "The picture may change temporarily in January and February as weather-related shortages lead to price spikes, but this effect should soon fade as well."

Price controls imposed late last year on energy and farm products could be in force for longer, while the tension between rising coal prices and fixed electricity tariffs would persists for at least a few more months, he said.

The snow disruption that hit much of China rekindled the debate over lifting price controls on electricity. Many power plants were reluctant to build expensive coal stockpiles, leaving them almost without reserves after road and rail transport broke down.

"Thirty years into economic reform, any further step to tackle in-depth problems will require more effort and caution than ever. But reform itself is the trend," Wen said.

Many experts have argued that the government's goal of restructuring the economy, with a move toward higher value-added activity, would lift the country's production costs. So would moves toward energy conservation and greater employee rights, they say.

As only 3 percent of commodities and services are still priced by the government -- mostly energy, communications and public services run by state-owned enterprises -- easing price controls will become more of a game of interest balancing, they say.

"For monopoly businesses such as electricity, price adjustments must be pre-conditioned on effective cost examination. Companies must no longer be allowed to use resources at low cost or even for free," Wen said.