Cooking oil price hikes underscore government’s confidence

Posted: August 8th, 2011 | Tags: Communist Party, cooking oil, NDRC, price controls | No Comments »

The jug of cooking oil may not occupy pride of place in your kitchen, but in China it has become an unlikely gauge of the country’s economy. The Financial Times and Wall Street Journal (subscriptions required) both reported Wednesday that a major producer of cooking oil in China, Wilmar International, had raised the retail price of its products by 5%.

Cooking oil is not the most glamorous or obvious economic indicator. The move’s significance lies in events that happened more than half a year ago. Last December, the National Development and Reform Commission (NDRC), China’s economic planning body, ordered cooking oil producers to freeze prices to keep supply high in the run-up to the Chinese New Year festival.

The price of cooking oil along with meat and vegetables is of huge concern to China’s government. Most Chinese families remain poor and can afford few luxuries so a large part of their household spending goes on food. When prices are normal or low, people are content but when costs increase, these groups are hurt the most. Food prices rose 11.70% last December from a year earlier so to ward off grumbling, the government ordered cooking oil producers to cap prices.

The government is especially acute to the price of cooking oil. In the land of the stir-fry, cooking oil made from soybean is ubiquitous in Chinese kitchens. As the Wall Street Journal points out, jugs of the stuff are considered an appropriate gift.

Wednesday’s reports suggest that the government is comfortable enough with inflation to unfreeze cooking oil prices. Inflation hit 6.4% year-on-year in June, the highest rise since 2008, but is likely to steady or fall in the remainder of this year. One reason for this is pork prices, which fell for the first time in three months in July. Pork weighs heavily in the basket of everyday goods and services used to measure inflation, so spikes in pork prices can swing inflation significantly.

So far, only Singapore-based Wilmar International has raised cooking oil prices after the NDRC sanctioned its “informal request”. Other producers will likely follow suit since the government-linked China National Grain and Oils Information Center said price hikes were inevitable. Under the price caps, cooking oil firms were losing around 200 yuan (£19) for every ton they produced so they will welcome the development.

The NDRC, unsurprisingly, denied it had approved any price increases and the existence of any price caps.

An official surnamed Zhou from the NDRC’s pricing department said that the reports are groundless, as China has never imposed a ban on price increases and raising or lowering prices does not require the government’s approval. Prices are set by the cooking oil producers themselves, he added.