I  The analysis of price trend since 2005

Since 2005, the central government had continued implementing macro control policy and proactive monetary policy and fiscal policy, which achieved marked success that all types of price indexes presented a downward tendency. Through the year all the price indexes basically had the trend of being high at the beginning and decreasing towards the end.

Consumer Price Index (CPI) remained steady and increased by 1.9 percent from January to October in 2005. However, there were quite great discrepancies between the increases of different commodity prices.

From January to October, according to CPI statistics, the food price increased by 3.1%, among which the grain price increased by 1.7%, the prices of meat, eggs, and aquatic products all rose by more than 4 percent, the price of fresh vegetables increased by 7.9%, but the price of fresh fruit decreased by 0.9%. Meanwhile, according to the results from the nationwide investigation of National Bureau of Statistics on the production prices of 31000 agricultural production and operation units, the national agricultural price for the first three quarters (refers to the price charged by the farmers when they directly sold the product ) increased by 3.7 percent compared with that of the same period last year, and the prices of crop farming, forestry, animal husbandry, and fishery products increased by 1.6%, 3.5%, 5.2%, and 5.1% respectively. The composition of price demonstrated the discrepancies of comparative advantages inside the agricultural industry.

According to CPI statistics, the housing price had a relatively high increase of 5.6 percent, which influenced the residents most. This was largely relevant to the increase of nationwide real estate price. As for the real estate selling price, it increased by 12.5% for the first quarter, 10.1% for the second quarter, and 8.8% for the first three quarters.

According to Producer’s Price Index for Manufactured Products （PPI） from the National Bureau of Statistics and Corporate Goods Price Indices(CGPI) from People’s Bank of China, the increase of coal, oil, power, mining, and means of production price was quite large, but the price of processing and manufacturing industry products, especially the durable consumer goods basically didn’t rise, and even some price had a decline.

Compared with the prices of the same period last year, from January to October, the producer price of manufactured goods increased by 5.3%, and the purchase price of raw materials, fuel, power increased by 8.9%. In October, the producer price of manufactured goods increased by 4% as against that of October of the last year, and the extent of increase fell by 0.5% as against that of September this year. The purchase price of raw materials, fuel, power increased by 6.5%, and the extent of increase fell by 0.6% as against that of September this year.

As for the producer price of manufactured goods, the producer price of means of production increased by 5.6% as against that of the same month last year. Among them, mining industry increased by 25.9%, the raw material industry increased by 8.3%, and processing industry increased by 1%. The producer price of means of subsistence decreased by 0.5% compared with that of the same month last year. Among them, food industry increased by 0.3%, clothing industry increased by 1.2%, daily necessities increased by 1.5%, and durable consumer goods decreased by 3.2%.

Under the influence of the price hike of international petroleum and other natural resource product like iron stone, the domestic fuel and raw material had a relatively large price increase. To be classified by varieties, the producer price of crude oil increased by 33.3% as against that of the same month last year, which raised the producer price of manufactured goods by 1.1%. The producer price of petrol increased by 25.1%, that of diesel oil increased by 20.5%, and that of kerosene increased by 21.3%. The producer prices of coal mining and ore dressing and sorting industries increased by 19.2% compared with that of the same period last year. Among them, the producer price of raw coal increased by 19.1%. The price of building steel first increased and then decreased, whose general price level was lower than that of the last year. In the first quarter, influenced by the great increase of imported iron stone price, relatively large investment in ongoing construction and market speculation mentality， domestic building steel use once had a large increase. From April, the steel price once started to decrease in an all-round way, and increased a little in July and August, and again had a decline in September and October. This reflected that government’s regulation and control on investment in social fixed assets was fairly effective.

II. Problems of price operation and their effects

In 2005 the greatest issue in our price operation was the huge influence from the international market, which was reflected in the following three aspects:

Firstly, since 2005, continuing from the trend of increase in 2004, the price of crude oil and iron stone continuingly rose. The reason that crude oil market price had a large raise included the regular factors of international economy such as the rapid development of China and America’s economy, as well as the natural calamity factors such as hurricane. However, the root cause was the too high international petroleum capacity utilization, which made the market oversensitive. There only had to be the slightest movement and the floating capital would stir up trouble. The iron stone price was obviously rigged by the seller’s monopoly group, as the rapid increase of demand would make the balance of price incline to the resource oligarchs, under the condition that high quality iron stone resources were too concentrated. As the basic price of economy, the price of crude oil and iron stone had considerable influence on China’s economy. When the domestic basic price was raised passively, as the manufactured goods was in a buyer’s market, the upstream price hike couldn’t be transmitted to the downstream price, which led to the great profit decline of the manufacturing industry.

Secondly, due to the booming international economy and rapidly increasing freight volume of staple natural resource product, international ocean shipping expenses increased swiftly. As China’s Dependence Degree of Foreign Trade was quite high, China had to import a great quantity of natural resource products such as iron stone and crude oil, as well as the production equipment, and meanwhile exported a great quantity of manufactured goods. The large increase of international ocean shipping expenses led to the increasing expenses of the departments who participated in the international market, which further decreased profit margin.

Thirdly, while the price of international natural resource commodity and production equipment was difficult to be reduced, the price of China’s exported commodity was difficult to be increased. China had disadvantaged terms of international trade.

The second critical problem in our price system was that the foundational departments such as petroleum, power, telecommunications, iron and steel, were in a monopolized market, but the manufactured industry was in a buyer’s market which was over competitive. This dual market structure made the price transmission mechanism not work properly. The upstream enterprise which was monopolized had the innate motivation to raise the price, while the downstream enterprise couldn’t release the price pressure and could only survived by decreasing the wage, producing the low quality products, without money for research and industrial technology upgrades.

   Since 2005, while the upstream product price continuingly increased and the downstream product price basically remained the same or had a slight decline, the scissors gap between the prices of upstream and downstream products would be further enlarged. Co-influenced by the seller’s market of the upstream product and the buyer’s market of the downstream product, the price transmission mechanism didn’t work properly.

The third problem is our price system was that the high prices of real estate, health services, and education was a tremendous pressure on the residents’ income and greatly restricted the residents’ consumption power, which put a curb on China’s consumption market’s further initiation and expansion. If this problem left unresolved, our economy would be in a strange situation of “rapid development yet low consumption”.

The fourth problem was that our agricultural produce price was influenced by the improper import policy. In 2005, China had a bumper harvest, but the import of grains had a large increase, which was opposite to increasing the farmers’ income. As our urban residents’ Engels coefficient was fairly low, we should properly increased the grains price, which wouldn’t affect the living level of urban residents and meanwhile increased the rural residents’ income.

III The basic estimation of price for the next year

The price trend of the next year is determined by the following aspects:

The first aspect is the international petroleum price trend, as well as the adjustment direction and strength of energy policy of China. According to our studies, the international petroleum price in 2006 will probably fluctuate between fifty and sixty dollars, which will be lower than that of the year 2005. In this case, if government didn’t formulate and implement the policy of resource tax to stimulate the increase of energy price or start the policy to transform administrative fees into taxes, the increase tendency of domestic petroleum products prices could slow down. If we start the resource tax and tax-for-fees reform, the energy price will increase further.

The second aspect is the price negotiation between China and international iron stone oligarchs. Presently, the ironstone price has lost its motivation to keep on growing dramatically. The high price of steels in 2005 has inhibited the consumption. The international market price of steels is also falling down now. Therefore, generally the steel price in 2006 would not increase dramatically.

The third aspect is the influence of grain price. In 2005 we had a bumper harvest of grain and imported a certain amount of grain meanwhile; therefore our grain storage had some increase. In the circumstances, if no big natural disasters occur, the grain price in 2006 would hardly increase greatly, but would even decline. Because grain price takes up a big proportion of CPI, CPI would hardly increase forcefully next year.

The fourth aspect is the influence of international market. Organization for Economic Co-operation and Development (OECD) issued its Economic Forecasts(Autumn 2005) on November 29th, which pointed out that the whole economic growth rate of its 30 member countries in 2005 and 2006 will reach 2.7% and 2.9% respectively, higher than 2.6% and 2.8% which was predicted in Economic Forecasts (Spring 2005). Despite that the United States suffered from hurricane and oil price hike, its economy kept a rapid growth. The organization predicted that, this year the economic growth of the United States would be kept at 3.6%, while next year would increase to 3.5% from previously predicted 3.3%. This year Japan’s economy would increase by 2.4%, and in the next two years would keep the growth rate of 2%. OECD also predicted that in this year and next year the economic growth rate of Euro Area would reach 1.4% and 2.1%, higher than that in previous prediction. If in 2006 the international economy would increase rapidly, there would be continuing need of domestic export commodity. It is a good thing for domestic manufacturing, which produces much more than needed. Otherwise the superfluous productive capacity would give more negative pressure to domestic manufacturing price.

The fifth aspect is the monetary supply. In 2005, government adopted the sound monetary policy and fiscal policy, inhibiting the monetary supply from increasing too rapidly, which played an important role in preventing the price from rising too rapidly and investment expansion. In 2006, the central bank would continue implementing the sound monetary policy, so the monetary supply wouldn’t be markedly stimulated by the price increase.

The sixth aspect is the time and strength of implementation of resources tax policy. If government adopted relatively high resources tax, it would raise the whole price foundation and form a certain pressure to force the commodity price to increase. However, limited by the dual market structure and the buyer’s market of our manufacturing industry, the increase of resources and monopolized commodities’ price would be much higher than that of manufacturing commodities and agricultural produce.

Generally speaking, if policy didn’t have significant change, the price trend in 2006 would basically be quite stable. If the price would have a raise, the main impetus should be the reform measures and the reconstruction of economic structure.