Chinese inflation

Why China's bullying is a bad idea

It’s not just because your mother told you not to do it (or should have), it’s because it usually backfires.

On the face of it, China’s actions against consumer product giant Unilever last month looked like a classic case of attack the foreigner. But it wasn’t, it was part of China’s overall bullying tactic.

On May 6, China’s National Development and Reform Commission, a powerful central planning agency, said in a statement that comments by Unilever about possible price rises had “intensified inflationary expectations among consumers” and “seriously distorted market order”, and it fined Unilever Rmb2 million ($308,000) for that so-called distortion.

Five days later, the government released data that everyone expected anyway: consumer prices rose 5.3% from a year earlier for the month of April. Inflation remained — and remains — on the rise, despite government pledges to rein it in at just 3%.

Consider that the communist party came into power in 1949 in part because hyperinflation after World War II damaged the credibility of the nationalist regime. And remember that the protests at Tiananmen Square in 1989 were also fuelled by rising inflation — it’s easy to understand why the government takes the threat of inflation rather seriously.

The fine isn’t likely to scare foreign companies, though, because they’re after that big prize: a billion Chinese consumers. Indeed, Unilever paid it without complaint and said that “as a responsible company we abide by laws and regulations in China”.

Some wonder if Chinese officials could have handled the situation better — couldn’t they have pulled the Unilever executives aside and explained the importance of national unity?

“Beijing already pulled Unilever aside, but then Chinese officials decided they needed to publicly blame someone. So they picked Unilever, which was the unlucky one,” explained Gordon Chang, author of The Coming Collapse of China.

Personal care companies such as Unilever, Procter & Gamble, Zhejiang-based Nice, and Guangdong-based Liby Enterprise had all informed retailers that they planned to increase prices by 5% to 15% in late March. But plans were suspended after the government talked with companies to stabilise prices under heavy pressure of inflation. Then China made an example of Unilever, or as Chang put it, “it was the unlucky one”.

Given that it could have picked Procter & Gamble as well, it’s not a clear-cut case of just going after the foreigner, and given Nice and Liby also got reprimanded, it shows the government is clearly talking tough to its own companies as well.

The government has most certainly gone after domestic companies, it just hasn’t made front-page news. In November, officials asked the four largest producers of cooking oil to hold off price increases until March, and then it renewed the request in April — twice.

Officials have also told coal miners that they too should keep prices steady; this has prompted China watchers to draw the conclusion that Hong Kong’s now sporadic blue skies will soon be a thing of the past as manufacturers in Guangdong resort to their own dirty generators to produce electricity, because, if you can’t raise electricity prices, the only other option is to stop selling it.

“China can strong-arm companies on pricing, but that tactic can work only for another half year at most,” said Chang. “Domestic companies are already raising prices by decreasing sizes and adulterating products. Disobedience is about to become more widespread.”

Many of the instant noodle companies have re-packaged their offering from 95-gramme serving sizes to 85-gramme sizes. The price, though, has remained stable. This is relatively harmless.

But we all know the horror stories of what happens when Chinese producers start “adulterating products”. In 2008, more than 50,000 children were treated after they were fed on baby milk powder contaminated with melamine, which had been added to milk to cause it to appear to have a higher protein content. Six infants died from kidney damage and a further 860 babes were hospitalised. A few months later, tests by Japanese, South Korean and Hong Kong authorities on imported egg powder and eggs from China found melamine contamination. Japan found melamine in frozen fried chicken imported from China. Taiwanese authorities later detected melamine in baking ammonia imported from China. Cutting corners in China isn’t just dangerous for the Chinese, it’s dangerous for anyone who consumes food from the mainland.

Four years before these scandals, watered-down milk led to 13 infants dying of malnutrition.

This happens, in part, when producers are squeezed. It’s an attempt to get more out of less. Artificially sitting on prices seems short-sighted and potentially dangerous — China would be better off subsidising, because otherwise it is just asking private manufacturers to basically underwrite a huge welfare payout, which is a recipe for disaster.

¬ Haymarket Media Limited. All rights reserved.
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