The Chinese government has signalled a new approach to combating rapidly rising inflation: putting direct pressure on major companies to resist price rises.

Unilever, the giant Anglo-Dutch consumer goods group, has said that it will postpone planned price rises on items such as soap, shampoo and laundry detergents after talks with Chinese authorities.

Last week, Chinese shoppers emptied supermarket shelves of items such as shampoo, soaps and even instant noodles, after the state-owned media reported that major companies — including Unilever and Procter & Gamble — were planning to lift prices by 5% and 15% from the beginning of April.

Alarmed by the reaction, the National Development and Reform Commission (NDRC) — the country’s economic planning agency — contacted the companies, urging them to exercise price restraint.

Other Chinese companies including Liby, a leading detergent producer, and Tingyi, which produces half of China’s instant noodles, also agreed to delay planned price rises.

The Chinese authorities are clearly worried that rising prices — particularly for essential goods such as food — could trigger increasing social and political unrest. Food prices rose 11% in the year to February, more than twice the 4.9% in the overall consumer price index.

Last November, the Chinese government responded to a scare over rising cooking oil prices by ordering the country’s largest edible-oil producers not to increase prices until March.

But while Chinese authorities routinely apply pressure on Chinese companies — particularly the state-owned enterprises — this is one of the first instances in which foreign multinational companies have been asked to hold off raising prices, and to absorb the rising cost of energy and other raw materials.

The latest development comes at a time when the Chinese government is grappling with a thorny issue. On the one hand, it’s worried about rising inflation. But, at the same time, it’s worried that if it applies the brakes too heavily, economic activity will plummet, and unemployment will jump sharply.

As a result, the Chinese government is relying heavily on administrative measures to keep inflation under control. The country has raised its reserve requirement ratio — the money that banks have to keep on reserve with the central bank — nine times since 2010, each time by 0.5 percentage points. This limits how much banks have available to lend. At the same time, the Chinese central bank and its banking regulator are setting individual lending limits for banks, and checking closely that banks are complying with their directions.

In contrast, interest rates have only been increased three times, and the country’s one-year yuan deposit rate is still at 3%, well below the country’s inflation rate, which is expected to climb above 5% in coming months.

In his latest newsletter, Michael Pettis, a professor at Peking University’s Guanghua School of Management, points out that there has been a subtle shift in the stance of the Chinese central bank, the People’s Bank of China.

At their conference in the final quarter of 2010, the PBOC predicted the global economy would continue to grow this year. It declared its top priority was to stabilise prices, and said it would bring credit growth to “normal” limits.

But at their 2011 first quarter conference, the Chinese central bank said the basis of the global recovery was not very solid. And although it still believed stabilising price levels was an important task, it only referred to “managing liquidity”.

According to Pettis, the shift is telling. “I suspect it means that policy makers are becoming a little more concerned with slowing growth and a little less concerned about domestic overheating.”

China’s economic growth, he says, “may be slowing more quickly than Beijing would like, and combined with the very volatile external environment, I suspect they are going to be cautious about too much more tightening. We will see how many more interest rate hikes and reserve requirement hikes we are likely to get in the next quarter.”

This makes it more likely that we’re likely to see the Chinese government leaning more heavily on direct intervention — rather than on tighter monetary policy — to control rising prices.

*This article first appeared on Business Spectator

Peter Fray

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