As of January 1, the price of electricity produced by coal increased by 0.7 fen (0.08 US cent) per kilowatt/hour. The government had earlier suggested a price hike of up to 12 yuan (US$1.44) per ton for coal used for power generation.

A new set of water pricing regulations also took effect on January 1 to raise the price of water for industrial use.

Though reasons behind each price hike vary, these initiatives all point to a significant change in the supply-demand situation as the economy enters a new phase of accelerated growth.

The government has so far limited the price hikes to industrial users, but domestic consumers are expected to feel the pinch soon as the cost-price spiral ripples through the economy.

Last year's hot-red investment in the automobile and real estate sectors not only sparked the country's economic pick-up, but pushed up demand for production goods like steel, aluminium and cement.

Official estimates indicate the annual growth of investment in fixed assets reached 23 per cent in 2003, contributing to 60 to 70 per cent of gross domestic product (GDP) growth.

The real growth rate of capital investment is reminiscent of the early 1990s when inflation was rampant.

Now a shortage of energy supply has forced the authorities to give more priority to solving that problem.

Electricity consumption has maintained a yearly growth rate of more than 15 per cent since June 2002. But according to the State Grid Corporation, China's power consumption will exceed 2 trillion kilowatt-hours this year, up 11 per cent over 2003.

The yawning gap between a soaring industrial demand for power and inadequate growth in generating capacity must be narrowed.

Efforts by the State Council to tighten control over investment in fixed assets, especially excessive investment in certain industries, should help rein in growth in power demand. And lifting the cap on electricity prices will help cool the investment boom.

Still, the aggressive use of administrative measures to deal with the cause of inflation pressures would be counter productive if it comes at the cost of market-oriented reform in the power sector.

The National Development and Reform Commission's recent decision to hike the price of power can be viewed as a stopgap solution to the evolving power shortages.

Last year, the commission was widely criticized for responding too slowly to the changed market situation in the power sector. It was said that the commission has been sticking to the old practice of rejecting all power plant construction projects for three years since the late 1990s, partly in order to prevent existing players from undercutting each other in the period of oversupply following the Southeast Asian financial crisis.

In retrospect, the commission has apparently failed to keep abreast of the underlying changes in the economy's power demand.

The latest power price hike looks like a win-win solution because it will discourage expansion of energy-consuming industries while pleasing the power sector which was caught in a bitter battle with the coal sector.

Failure to reach an agreement on the price of coal to thermal power plants led to inadequate coal supplies when the power sector needed to operate at full capacity to relieve power shortages last year. Now, the increased profit margin will allow the power sector to accept a higher coal price.

Nevertheless, the price hike in fact brings an end to the market-oriented reform in power supply initiated last year.

To raise the efficiency of power companies, the newly-established State Electricity Regulatory Commission (SERC) tried out a competitive mechanism to allow the cheapest power supply sold through the grid in Northeast China.

Admittedly, the programme is more feasible in a market of oversupply. The rocketing power demand has made impossible any competitive offer by power companies nowadays.

But the SERC's guideline to goad power companies to strengthen their competitiveness is essential to the sector's long-term development.

The electricity price hikes that protect power companies from increases in the market-based coal cost further fuelled the myth that generating capacity is more important than efficiency.

Worse, to quench their current thirst for power, many local governments are queuing up for approval of new power plant projects. It will be difficult for the planning authorities to reject these applications when growth of power supply conspicuously falls behind the country's overall economic development.

The authorities must weigh both the immediate and long-term effects of its policy. The need to increase generating capacity should not eclipse the urgency to improve the power sector's efficiency.

Unlike those consumer prices flexibly fixed by market demand, the rise in State-controlled prices of electricity and water clearly represents a more fundamental change in the direction of the country's pricing trends.

The robust growth of the Chinese economy indicates the country's price level will inevitably gain new altitude this year.

The inflationary spiral may give domestic companies some breathing room from increasingly fierce competition, but high quality growth remains a top priority for their survival.

 (China Daily )