Photo: gruntzooki on flickr
This is funky, and I’ve been scratching my head ever since reading the news earlier today.The facts:
China’s pricing authority has fined consumer product giant Unilever Plc 2 million yuan ($308,000) for saying it might increase prices of some for products in China.
The National Development and Reform Commission (NDRC), a powerful central planning agency, said in a statement on Friday that comments by Unilever officials about possible price rises had “intensified inflationary expectations among consumers” and “seriously distorted market order”.
Whoa. That’s a hefty fine for a China government body. Usually we’re talking about several thousand RMB for an administrative fine, and only when disgorgement of profits is involved do the numbers rise into the millions. Seems like this is wholly on the administrative side too, since it only involves statements made in anticipation of price rises.
The background on all of this is straightforward. China has been freaking out over inflation for quite a while now, which is not surprising in the least once you remember the key role that inflationary pressures played in events back in 1989, not to mention the late 1940s. High inflation leads to scary things in modern China.
That being said, when economists talk about inflationary expectations (like the NDRC is doing with the Unilever situation), the context is usually consumers and businesses taking cues from central bankers or finance ministers. I don’t know about you, but back when I studied macroeconomics in grad school, I seem to recall that rational expectations theory involved central bank actions and not corporations making public statements about future price hikes.
What about the legal side of this? Well, if you’ll notice, that above quote also references a distortion of the market order. This is Price Law and Unfair Competition Law territory, and in fact, the former was cited as the grounds for Unilever’s fine.
What does the Price Law say about public speculation of future price rises by companies? Well, this is not exactly my area of expertise (I’m much more comfortable with the Anti-Unfair Competition Law or Anti-Monopoly Law than I am with the Price Law), but at least with the Price Law itself, I can’t find anything specifically on point.
Yes, the law does prohibit business operators from spreading price information. But this is not about inflation. The purpose of that provision, stated clearly, is to stop companies from pushing prices up to excessively high levels for no other reason but to make additional profits.
That’s not what happened here of course. China is experiencing a clear inflationary trend, and I’m sure that Unilever’s raw material costs have indeed gone up, as they said at the time. No fraudulent manipulation there, no price gouging. And remember, we’re talking about speculation of price rises, not any actual rise in price! The government’s worry is not about illegal gains by Unilevel, but the effect of their statements on consumers.
The Price Law, as with almost all other Chinese laws, also contains some catch-all provisions that give the administrative authority the ability to deign certain kinds of pricing behaviours illicit. By way of a disclaimer, it is quite possible that there are regulations out there on public disclosures by companies that are relevant to this case, and I simply do not have enough specific knowledge of the price law system.
The only other thing I can think of in the Price Law itself involves emergency measures. The government does enjoy some rather sweeping authority when it comes to price setting and implementation in emergency situations. Sudden sharp price increases can be emergencies, although I’m not sure if what we have been experiencing in the last year qualifies.
Putting the legal justification aside, I’m feeling rather sympathetic to Unilever, at least based on the limited information reported in the press. I know how sensitive inflation is in China, and I’m sure that the statements made by Unilever did in reality alter pricing behaviour of other businesses as well as consumers — we’ve seen specific incidents of panic buying in recent months, for example. But retailers were in a tough spot, and it seems as though they pretty much did as they were told by the NDRC:
Personal care producers such as Unilever, Procter & Gamble, Zhejiang-based Nice, and Guangdong-based Liby informed retailers to increase prices by 5 to 15 per cent in late March. But plans were suspended after the National Development and Reform Commission talked with companies to stabilise prices under heavy pressure of inflation.
So they wanted to raise prices, the NDRC said no, and they didn’t do it. And now subsequently Unilever is being slammed for merely talking about the price hikes? That’s harsh.
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