Running Afoul of China's Price Law

This morning in China, we learned the local trade surplus widened last month to $11.4 billion. That’s higher than any of the guesses that came from Wall Street. Exports for the red nation surged to a record high.

“China’s unfair currency manipulation has gone on for far too long,” commented Sen. Sherrod Brown (D-Ohio) eliciting a groan not of our own making, “and it’s clear that legislation is needed to level the playing field.”

Sherrod (pronounced ‘charade’) is sponsoring a bill with Sen. Olympia Snowe (R-Maine) that would slap new trade sanctions on China.

For their part, the Chinese government is mucking with the trade environment by fining the Anglo-Dutch consumer products giant Unilever for an unpardonable crime: alerting the media that it is raising prices.

Unilever, maker of everything from Lux soap to Lipton tea, made the announcement in late March – much to the consternation of the National Development and Reform Commission. The NDRC says the news “disrupted market prices” and resulted in the hoarding of consumer goods in several cities – driving sales to 100 times “normal levels.”

It appears Unilever ran afoul of China’s Price Law – forbidding business from “fabricating and distributing information about price increases, raising prices collectively and pushing up prices excessively.”

As a consequence, “severe punishment was meted out this time to break ugly habits and build new rules,” read the NDRC statement. “We accept the decision of NDRC and Shanghai Price Bureau,” says a statement from Unilever, displaying the requisite amount of humility.

The fine amounts to $308,000, but the size is “quite significant” in the eyes of Nicholas French, who works in the Beijing office of the global law firm Freshfields Bruckhaus Deringer. “Clearly, it’s all to do with inflationary pressures and keeping that under control.”

Meanwhile, the Chinese food and beverage maker Tingyi got off with only a warning for its transgression against the Price Law.

The firm made an announcement in March about its Master Kong brand, which accounts for half of China’s instant-noodle market. Tingyi would not raise prices, but rather would postpone a price increase.

Guess that ran afoul of the authorities, too. “We will follow the instructions by the government to make inflation stable,” Tingyi’s CFO tells Bloomberg, obviously still smarting from whatever knuckle rapping was administered behind closed doors. “Although our gross margin will be squeezed, we’ve decided to suspend” price increases.

Of course, none of this has to do with inflation. Gulp.

By official statistics, consumer prices in China jumped an annualized 5.4% in March. Unofficially, the figure is probably double that.

Last week, the central bank issued a statement saying, “Stabilizing prices and managing inflation expectations are critical,” sounding more or less as benign as Ben Bernanke at the Federal Reserve press conference (and fun camp) last week.

Addison Wiggin
for The Daily Reckoning