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China to freeze energy prices

January 10, 2008|Don Lee | Times Staff Writer

SHANGHAI — Seeking to allay public discontent over inflation, China's government Wednesday froze prices on gasoline and other energy sources and warned of punishment for hoarding.

The freeze will also apply to the price of water, power and natural gas, plus mass transportation fees. The government said it would also stabilize prices for medical treatment and fertilizer.

Soaring food prices have been the main driver behind inflation. A few days ago, the Chinese Academy of Social Sciences said it found in a survey that inflation was the top concern among urban and rural residents.

In September, as inflationary pressures were building, Beijing announced a similar freeze, but in November, the central government, which subsidizes fuel costs for consumers, raised pump prices by almost 10%, to about $2.60 a gallon for mid-grade gas. That helped push the year-over-year inflation rate to 6.9% in November, an 11-year high.

Over the last decade, inflation in China has been very low even as the economy expanded at a blistering pace. But in the second half of 2007, the price of meat and other foods jumped, partly because of higher grain prices that have pinched consumers worldwide.

Incomes in China generally have been rising rapidly, but officials worry that surging food prices will spread to other sectors and eat away at people's standard of living. That could trigger social unrest. Inflation in the late 1980s was a factor contributing to the political crisis that culminated in the Tiananmen Square protests that turned deadly in June 1989.

Chinese leaders "have a very clear political lesson from June 4," said Barry Naughton, a China economy specialist at UC San Diego. "They consider inflation to be extremely threatening."

Beijing didn't say how long the price controls would last or how much they would cost. Chinese businesses have complained about higher costs for transportation and commodities, saying they have put pressure on them to raise wages.

"In the short term, this will definitely work," said Yi Xianrong, a researcher at the Chinese Academy of Social Sciences, referring to the price freeze. "Because all the energy enterprises are state-owned, the government has the ability to take the price into control." China also has large cash reserves.

Still, Yi doesn't think the policy will last long because it will further distort the pricing system and wreak havoc on oil refineries, which have complained about heavy losses because of the difference between what they must pay in world markets and what they can charge in China. That has resulted in supply constraints, long lines at gas stations and hoarding.

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don.lee@latimes.com

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