China will cap price rises by manufacturers to keep consumer inflation stable following the country's fuel price hike, the National Development and Reform Commission said in a statement over the weekend.
China's surprise announcement last Thursday of a nearly 20% increase in fuel prices sparked worries that it would stoke inflation already near its highest in more than a decade. "All regions must seriously implement measures concerning the adjustment on refined oil and power prices, strictly control chain reactions and keep the consumer price level basically stable" the NDRC said on its website. NDRC added that the government would limit price rises for downstream products and urge manufacturers to cut production costs in order to digest much of the fuel price rise themselves. Analysts have said that businesses already facing higher labor costs will find their margins squeezed if they do not pass the rising fuel costs on to consumers. The NDRC statement said any official not fully implementing the new measures would be punished. The planning agency last week kept some prices unchanged, including liquefied gas, natural gas and public transportation rates, to reduce the impact of the fuel price increase on ordinary people. Government officials and economists have said the fuel price rise would add less than 1 percentage point to inflation this year. China's inflation dropped to 7.7% in May from 8.5% in April, but pipeline inflationary pressure has been building as input costs have risen for producers at their fastest pace in nearly four years Earlier in the month the World Bank had raised its forecast for China's inflation this year to 7% from 4.6% as previously projected in February, but said the fundamentals of the economy remained robust In its latest economy quarterly update release the World Bank raised its projection for China's GDP growth in 2008 to 9.8% from 9.6%, citing new data adjustment made by the National Bureau of Statistics that points to a better performing service sector. The World Bank added that economic activity in China has moderated in line with the global economic slowdown but real growth of exports and imports remains robust. Industrial growth also picked up in the second quarter but oil price rises is expected to spill over into the consumer inflation zone in the coming quarter. The World Bank also suggested that China reform its refined oil pricing regime to bring it in line with international crude prices. China has imposed regulation on its domestic refined oil prices to reduce its impact on consumers, many of whom are poor farmers using agricultural machines. "But it's definitely in China's interest to let the big increases in the oil prices in the world markets pass through Chinese firms and households to encourage them to be more energy-efficient" said David Dollar, the Bank's country chief for China. "The change does not have to be all at once. It can be gradual and an exact timetable is not that important". If China lets the oil price rise gradually, "it should not have a big effect on inflation", said Dollar.