The Market Calls the Shots

By+Deng+Yaqing

China has liberalized the prices of 24 categories of commodities and services， signifying the nations resolution to further push forward marketization. Focused on the elimination of price regulation， the first batch of reform subjects include tobacco， railway and civil aviation transportation， as well as port services， civilian blasting material and some professional services.

Xu Kunlin， Director of the Bureau of Price Supervision and Anti-Monopoly of the National Development and Reform Commission （NDRC）， noted that the reform focuses on unleashing market segments that have become qualified for free competition and network-structured monopolistic sectors.

As price reform continues in the market， concerns have emerged over whether prices of commodities and services closely bound up with peoples livelihood will get out of control. Ji Pengcheng， a research fellow with the Institute of Economic System and Management of the NDRC argued that price liberalization doesnt mean leaving the market to its own fate but rather shifting attention to the supervision of market activities and price law enforcement.

“Following this round of price liberalization， efforts will also be made to facilitate reforms on the pricing of medicine and medical services， electricity， natural gas， railway transportation and so on，” said Xu.

A competitive market

At an executive meeting of the State Council held on November 15， 2014， Premier Li Keqiang stressed that the crux of marketization lies in price reform.

“Government pricing is conducive to the price stabilization of certain commodities and services and has contributed much to Chinas rapid economic growth since reform and opening up，” said Lin Huocan， a financial commentator， who at the same time noted that price regulation may lead to the detachment of price from market demand and supply resulting in damage to the benefit of both consumers and suppliers.

From the perspective of suppliers， strict price regulation dampens enterprisesenthusiasm to manufacture products， said Lin， who brought up medicine as an example. When the government still imposed maximum retail prices on medicine， pharmaceutical enterprises were not highly motivated to produce low-price medicine， which led to supply shortages. Whats worse is that when the price of medicinal materials shot up， the production cost of some low-price medicine even surpassed their maximum retail price. As a consequence， many economical and effective medicines have vanished from the market.

“If enterprises lack the motivation to manufacture， they will not be capable of providing more low-cost and high-quality products and services， which will indirectly undermine the interests of consumers，” said Lin.

Financial commentator Qiao Ruiqing argued that the elimination of price regulation is half the battle of price reform and what the government needs to do in the next step is to ensure the market mechanism can play a major role in price formation.

transportation pricing matters

Since railway transportation prices affect national economy and peoples everyday life most， the NDRCs decision of freeing up the pricing of railway transportation attracts wide public attention.

The pricing of railway bulk and parcel transportation as well as that of cargo and passenger transportation through newly built railways invested or controlled by social capital will be liberalized.

The move is believed to help railway transportation enterprises optimize their service structure and quality， shepherd social capital into railway construction and fuel the competition between different types of transportation to establish a comprehensive traffic and transportation system.

Li Kun， an associate researcher from the Institute of Comprehensive Transportation of the NDRC， believes the move is designed to stimulate social investment in the railway sector and propel infrastructure development. In fact， the State Council has been committed to reforming railway financing and investment systems and encouraging social capital to flow into railway construction.

Moreover， the NDRC and Civil Aviation Administration of China announced that they would completely liberalize the cargo transportation prices of domestic flights， free up the passenger transportation prices of 101 shorthaul airlines connecting adjacent provinces and competing with ground transportation， and transfer the power of establishing and adjusting benchmark prices to air transportation enterprises for domestic airlines， which retain government guidance prices.

Wang Tongshui， President of Civil Aviation University of China （CAUC）， said these measures target at reduction of government intervention， which will improve the efficiency of resource allocation， revitalize the market and arouse the investment enthusiasm of social capital. Beyond that， airline companies will be motivated to upgrade management， strengthen competitiveness and foster new growth points.

Li Xiaojin， a professor from the Economics and Management College of the CAUC， said the elimination of price regulation will give airline companies more freedom to align price with demand in order to elevate seat occupancy rates and offer consumers more choices.

“What people care about most is whether the elimination of price regulation will lead to a price hike. The answer is no，” said Cheng Xingyun， a transportation and communication official from the NDRCs price department.

“Take the 101 short-haul airlines connecting adjacent provinces for example. Since almost all of them are no longer than 600 km， the prices of their air tickets are not likely to surge，” said Cheng.