From Overseas Press

China should scrap price controls

(chinadaily.com.cn)
Updated: 2011-06-04 11:51

For China to relieve the most severe water shortage in 60 years in the Yangtze River area and the most critical shortage of electricity since 2004, the government will have to scrap its longtime price controls, suggests an opinion piece published by the Wall Street Journal on June 2.

Although the authorities last week ordered the Three Gorges Dam to release water downstream and on Monday announced a one-time rise in electricity prices, the real solution appears much simpler, suggests the article, "Let the market determine prices".

Indeed, while government officials have been warning about a water crisis for a decade, China's water price has been kept artificially low, which averages about $0.40 per cubic meter?- "lower than in many emerging economies and a fraction of the real marginal cost"?- resulting in huge waste by farmers, factories and households alike.

The power sector also faces the same dilemma, as power generation companies normally shoulder the rising cost. "Beijing approved a 3% increase in prices that took effect Wednesday, but this hardly provides relief to utility firms when annual inflation is running at 5%, especially since residential users are exempt from the hike," the article explains.

"The ideal fix," argues the article, would be to deregulate the two sectors and let the market price decide "how a scarce resource should be allocated." But don't expect it to take place anytime soon, forewarns the article, "after all, Beijing's response to inflation over the past year has been price controls," and rising prices are feared to spur social unrest.

However, China will have to pay the bill for its price controls, the article concludes, as they hurt efficiency and depress incomes in the long run. Ultimately, "it will suffer from overcapacity in some sectors and crippling shortages in others."