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Cover Stories Series 2014> Reform Initiatives Underway for 2015> Retrospect> Opinion
UPDATED: November 24, 2014
Right Timing for Price Reform
By Zhou Zixun

Chinese Premier Li Keqiang pledged to accelerate price reform at a recent executive meeting of the State Council. Li pointed out that although price reform is difficult to carry out, it has long-term benefits and is a necessary step toward establishing the market mechanism. Price reform constitutes the crux of market-oriented reform.

China's market-oriented reform has to deal with two core issues: the relationship between the government and the market and the market's role in allocating resources. In other words, the government should delegate more powers, provide more services and interfere less with the market, allowing the market to play a bigger role in the economy. Price reform is the touchstone for the market-oriented reform and the key to the transformation of government functions.

Since last year, China has rolled out a series of price reform measures for natural resource products aimed at promoting energy conservation and environmental protection, such as the price adjustment of non-resident natural gas and a price increase in renewable energy products. This year, the National Development and Reform Commission has made moves to promote price reform for natural resource products. However, in order for the price reform to become successful, four issues need to be clarified.

First, the reform of pricing mechanism of natural resource products needs to reflect market supply and demand. However, in China, the majority of resource products are controlled by a few state-owned enterprises. Therefore, the monopoly of large state-owned companies should first be broken in order to carry out the price reform. Otherwise, worries that "price reform" means "price hike" will still remain. As Premier Li said, price reform is not intended to raise prices; rather, it should form a reasonable pricing mechanism that sets prices according to market demand.

Second, natural resource products concern the public's interest in addition to being commodities. It is therefore important to take into consideration people's affordability during price reform. The government's responsibilities also include guaranteeing the stable supply of life necessities and maintaining a reasonable standard of living.

Third, any reform should be adapted to the new situation and changes in the economy. The current low inflation has provided rare opportunities for furthering price reform. According to the National Bureau of Statistics, in October, consumer price index (CPI) increased 1.6 percent year on year, the slowest growth rate since January 2010, and producer price index (PPI) decreased 2.2 percent year on year, the 32nd month that PPI registered negative growth. All these indicate low inflation is permeating the economy and the country's economic growth is slowing down. Low inflation also means fewer obstacles for price reform, so the current reform should focus on streamlining administration and delegating more power to lower levels as well as stabilizing growth.

Fourth, when the problems of resource scarcity and environmental pollution are becoming increasingly serious, the price reform has provided a favorable opportunity for lifestyle changes, industrial transformation and upgrading. China and the United States have issued a joint statement on coping with climate change recently in Beijing. According to the statement, China will lift the share of non-fossil fuels in primary energy consumption to 20 percent by 2030. As the proportion of coal in energy consumption falls, the proportion of natural gas will increase in future energy mixes, which will in turn stimulate the price reform.

In a word, the time for price reform has come, and reform should be accelerated. Implementing price reform does not only mean reducing government interference in the market but also indicate establishing a standard pricing mechanism to realize the proper use of natural resources.

This is an edited excerpt from an article by Zhou Zixun, a financial commentator, published in China Economic Times

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