beyondbrics

Headline writers had an easy enough time coping with pork as the driver of Chinese inflation; it is, of course, just four-letters long and full of punning possibilities.  You can imagine their dismay, then, to find that a new culprit was Codonopsis pilosula.

Yet the fate of this medicinal herb speaks volumes about China’s battle with inflation.

The root of C. pilosula has long been known to Chinese doctors for its usefulness in lowering blood pressure and strengthening the immune system. It shot to prominence in the financial world this week when the government vowed to punish hoarders of the herb, saying they had driven up the price of Chinese medicine and, in so doing, endangered the health of the population.

The price of the root has soared to Rmb90/kg, more than 10-times its cost in August 2009, the National Development and Reform Commission (NDRC), a powerful central planning agency, said in announcing the crackdown.

C. pilosula forms a microscopic part of China’s inflation basket compared with pork, which accounts for an estimated 3 per cent of the consumer price index. But the rising cost of traditional medicine is just the kind of inflation that Chinese leaders fear, because it has a disproportionate impact on poor, rural citizens, who are more likely to view C. pilosula as an essential part of their health regimen. Hence the root’s colloquial name: “poor man’s ginseng”.

To stabilise the price of the medicinal root, the NDRC vowed to put an end to hoarding. It told 10 merchants to sell their 200 tonne stocks of C. pilosula before Thursday at a price of Rmb60/kg, a third less than the prevailing market price. A further 44 merchants were ordered to sell their 800 tonne stocks by December.

Such measures are characteristic of the NDRC’s approach to policy. Although great swathes of the Chinese economy now resemble an unbridled free market, the NDRC is the government institution most prone to spasms of communist-era central planning.

Faced with inflation, it instinctively reaches for administrative fiat and price controls. In a notorious case earlier this year, it fined Unilever for talking about price increases for soap even though they were never put into effect.

The consequences of price controls, if implemented in a sustained fashion, are predictable enough. When officials tried to cap the price of beef noodles in Lanzhou, the capital of western Gansu province, restaurant owners responded by cutting the amount of meat in each bowl.

The NDRC might want to consider that precedent if C. pilosula is as important to health as traditional doctors say it is. Doses of poor man’s ginseng could get a lot lighter.

Related reading:
China’s pork inflation problem, beyondbrics
Red campaign in red: putting a price on China’s Maoist revival, beyondbrics
China’s economic chess game, beyondbrics