China's Anti-Inflation Drive Snares Unilever and Tingyi

Companies and CFOs in China were reminded last week that the People’s Republic remains very much different from other markets in Asia, even in the area of deciding how much to price their products.  

On its website, the National Development and Reform Commission (NRDC) published an interview between an unnamed reporter and an unnamed NDRC official about “price information offences” supposedly committed by Unilever, the world’s second-largest consumer goods manufacturer, and Tingyi, a major maker of instant noodles in China.
According to the NDRC, Unilever will be fined RMB2 million (US$307,800) for contravening the country’s Price Law by telling the media about its plans to increase the prices of its products.  
The agency and the Shanghai Price Bureau said that media interviews given by Unilever spokesperson Tin Man about the possibility of Unilever raising its prices caused consumers to buy the company’s products at volumes “several times or even ten times” higher than normal, causing shortages and panic.   
Tingyi did not appear to have told the media that will increase the price of its Master Kong instant noodles, but the NDRC apparently learned of its plan in March and sent what it describes as a “survey group” to look into the company’s production costs. The NRDC then concluded that a price increase is “inappropriate” and warned Tingyi against it.
Both companies say they will abide by the rulings. “Although our gross margin will be squeezed, we’ve decided to suspend [noodle price increases],” Tingyi CFO Frank Lin told Bloomberg.
Unilever and Tingyi are market leaders in their respective segments of the fast-moving consumer goods market, and so analysts are not surprised that their planned price increases worry the government. The continued hold on power by China’s communist ruler could be threatened by excessive inflation. As it is, consumer prices surged 5.4% in March, said to be the largest rise in 32 months.
But the blunt tools the government is bringing to bear on inflation could be counter-productive if they result in big losses to companies. Multinationals may decide to pull out from the country or cut back on their investments, resulting in job losses and a deceleration in GDP growth.
It will be unreasonable for the NDRC to require companies not to raise their prices given the soaring international prices of oil and commodities, not to say Beijing’s own orders raising minimum wages across the country.
Unwilling to let the markets decide price levels of shampoos, detergents and noodles, China’s bureaucrats will need to tread a fine line between the interests of corporates, consumers and the Communist Party. It remains to be seen whether the government can pull off such micro-economic management.

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