Communist China Fears Trouble Is Brewing at Home

Fearful of a repeat of the Tiananmen Square pro-democracy protests of 1989, which were brutally put down by the military and drew worldwide condemnation, the communist government of China has issued an order freezing the prices of state-controlled commodities until the end of the year in a bid to slow galloping inflation.

The Chinese Communist Party is afraid that growing unrest among workers may lead to protests to coincide with next month's Communist Party Congress, a meeting held every five years to reallocate senior party positions, a government decree this week suggests.

The Beijing administration is anxious that the rapid hike in food prices, which have risen 18.2% in the last 12 months, will lead to widespread street protests by the country's poor agricultural workers, who make up 60% of the population. The price of meat has risen 49% over the past year, prompted largely by a shortage of pork after outbreaks of "blue ear" disease.

In an effort to mollify growing discontent among China's better-off urban workers, the government simultaneously directed that the minimum wages of factory workers be increased.

China's inflation rate is of great concern to Western economies, which depend on the import of inexpensive Chinese goods made by cheap Chinese labor to bolster economic growth. A wave of protests by China's workers, whether in support of more democracy or in opposition to high prices, would cause alarm in the West, which has come to rely upon a stable China to maintain its prosperity.

Worries about inflation have become a preoccupation among China's work force of 800 million, a fact acknowledged by the country's one-party government. A poll issued yesterday by the Chinese central bank, the People's Bank of China, found that just 3.5% of households were satisfied with current price levels, an all-time low.

The nervousness has spread to those who run China's booming economy. A People's Bank survey of bankers yesterday showed their confidence in the Chinese economy to be at an all-time low, with most expecting the imposition of higher interest rates to combat raging inflation.

In a move announced by six government ministries on Wednesday, the state-run National Development and Reform Commission declared: "in principle, there will be no new price-adjustment measures before the end of the year. All current rules on goods and service prices controlled by the Government should be strictly implemented, and any unauthorized price rise is strictly forbidden."

Market order must be maintained to ensure the "smooth opening of the 17th Party Congress," and failure to reduce inflation would risk "development, reform, and stability," the government decree declared.

Although the Beijing government has adopted many elements of a market economy, it has not extended democracy to its people — a prerequisite for the operation of a true market economy — and it retains control of the prices of about a third of the country's staple commodities, including those of gasoline, diesel, electricity, sugar, salt, water, cooking oil, tobacco, coal, fertilizer, and fares on public transport. It also indirectly controls the price of grain and rice by supervising their supply.

Repeated efforts to control runaway inflation this year by raising interest rates have had little success. Last Friday, the People's Bank raised rates for the fifth time since January, lifting the one-year benchmark deposit rate to 3.87% and the one-year lending rate to 7.29%, in response to August's rise in the consumer price index rise to 6.5% a year, the highest monthly rate in a decade. The government's annual inflation target is just 3%.

The Central Bank governor, Zhou Xiaochuan, has hinted at more interest rate hikes in the coming months.

Price controls, which have been discredited in the West as a means of curbing inflation, are unlikely to have the desired effect. More efficient than attempting to curb prices, which are likely to surge even faster once the controls are lifted, is to trim the supply of money.

The money supply in China grew by an annual 18.09% in August, overtaking the central bank's annual target of 16% for the seventh consecutive month. Chinese banks lent $410 billion in new loans in the first eight months of the year, 97% of the total lent in 2006.

"It's by no means certain" that the price freeze "will be enough to stop consumer prices from continuing their rise," a Beijing-based macroeconomist with TX Consulting, Shi Lei, told Agence France-Presse yesterday.

Others are more optimistic. The decree "will help change expectations a bit. Some companies might have wanted to raise prices because of expected higher energy or resource prices. Now they can postpone that," a Citigroup economist in Beijing, Minggao Shen, told the Associated Press.

The announcement of the price freeze does not appear to have dampened China's booming economy, which expanded by 11.9% last quarter. The country's main stock price index hit a new high yesterday morning and real estate prices continue to soar.