Local governments' strong desire to raise public utility rates is putting increasing pressure on China's consumer price index (CPI) - a key inflation gauge.
This may well explain why the country's National Development and Reform Commission (NDRC) is now requiring companies providing gas, water and electric to consumers at the local level to implement mandated price controls.
A recent notice from the NDRC to local public utilities forbids rate increases in areas where the CPI rose more than 1 per cent in a one-month period or a total of 4 per cent for three consecutive months.
Although subject to government regulation, the prices of gas, water and electricity are under pressure as a result of significantly higher demand at both the residential and industrial level, said Zhuang Jian, a senior economist with the Asian Development Bank.
"China's fast-growing economy and improvements in residential consumption are creating an enormous demand for these basic services," he said.
But the services are monopolized by several State-owned sectors, where competition is not sufficient, he said. "Demand always surpasses supply."
"There is strong internal pressure in the industry to raise rates in proportion to the surging demand," he said.
Zhuang also says that without the government moving to keep utility charges from spiralling, the prices paid by consumers for many other products will edge higher, with uncertain consequences.
"The government may fail to meet its target of keeping the CPI to no more than 4 per cent," he said.
"Ordinary people's life and social stability may also be affected."
Qi Jingmei, a senior economist with the State Information Centre, agrees that market pressures on gas, water, electric and other utilities is of major concern, as it accounts for 22 to 23 per cent weight of the CPI.
Other factors such as rising food prices and the prices for raw materials, higher prices associated with oil imports, along with increasing costs to businesses in the areas of labor and logistics, costs would also have an impact on the CPI, Qi said.
In fact, the price pressures have already been felt by local residents.
A retired woman in
GuangZhou identified only as Liu complained that the prices for vegetable, pork, chicken and other food items rose too fast during the past several days.
"The prices have put very big pressure on families with low income that I am familiar with," Liu said.
As a result, the municipal government in the city, capital of South China's Guangdong Province, announced that it would not raise the prices of those products between March and May.
According to Zhuang, international oil prices are not likely to lower much this year, as there is strong demand from major economies such as China and the United States.
Limited oil supply due to production capacity and political turmoil, and speculative buying on the international market should also keep oil prices at a higher level, Zhuang said.
The rebound in fixed asset investment is also expected to contribute to a price rise for energy and raw materials, which would increase pressure on companies, he said.
"If the price rise does not translate into the final products, companies will see decreased profits," he said. "But if it is translated, people will have to spend more to buy the same products."
Qi said a big increase in prices for industrial products was unlikely, because a majority of them suffered from an oversupply.
"This may explain why people do not feel price rises in products such as clothing and home-use appliances," she said.
China's CPI rose at a year-on-year 2.9 per cent for the first two months, earlier figures from the National Bureau of Statistics indicate.
Economists claim this situation suggests the country's central bank still indicates a possibility to raise the interest rate further.
"There is still room for the People's Bank of China to raise the interest rate," said Chief Economist Tang Min of the Asian Development Bank's resident mission in China.
