China too passive on pricing
By Li Xinxin (China Daily)
Updated: 2004-07-01 13:45

For years, an incomplete oil purchase system and futures market have led to irrational competition between domestic buyers that only feeds foreign oil sellers.

The situation also makes the country passively accept international prices rather than taking initiative in the pricing process, thus suffering price traps and major economic losses.

China became a net importer of rudimentary products in the mid-1990s. The nation's deficit in trade of these products soared from US$2.35 billion in 1998 to around US$20 billion by 2003.

There are various reasons behind the current increase in international raw material prices.

Contract prices of many products in the international futures market are currently at an all-time high, whereas prices for iron ore and oil also have hit a 13-year high.

Official statistics indicate every US$1 fluctuation in the international oil price can cost or save China US$555.8 million in foreign exchange reserve, and result in a 0.043 percentage point change in gross domestic product (GDP) growth.

The surge in international commodity prices and the increasing dependence on imports have combined to make China's import volume grow sharply. China imported US$412.8 billion worth of products last year, up 39.9 per cent year on year. Imports in the first quarter of this year increased by 42.3 per cent over the same period last year.

Price hikes in the international market, which covers 83 per cent of China's imports, will cost the country an extra US$20-30 billion this year. China lost over US$2 billion in the first two months alone due to the rise in oil price.

The rise in international energy and raw material prices has major impacts on China's economy. The increased costs deal a blow to such industries as manufacturing, real estate, aviation and transport and have almost broken many enterprises' limit of endurance.

Prolonged high costs will hamper international competitiveness of Chinese products and the sustainability of the overall economic growth.

As commodity price basically hinges on the supply-demand complex, China should take advantage of its role as one of the major consumers to assume more initiative in price-making in the international market and extricate itself from the passive situation.

Sometimes when international oil price approaches US$40 a barrel, some countries still enjoy a price of less than US$20 a barrel. A main reason is they have mature futures markets to hedge against price risks.

With over 150 years' growth, the world now has over 100 major futures exchanges, covering 93 commodities and 267 types of futures contracts. The leverage of these exchanges on the global economy is ever increasing, thanks to their international-membership-based operation.

In contrast, China has only six futures items. China suffers a loss of several billion US dollars almost every time international oil price goes up.

It is a natural trend that China's price system should be in line with the international pricing mechanism, considering the country's role as a major importer and the sound infrastructure of its futures sector.

At present, three domestic futures exchanges - the Shanghai copper exchange, Dalian soybean exchange and Zhengzhou wheat exchange - have begun participating the global pricing system.

China now needs to step up improvements in the existing futures exchanges and open new ones for such major commodities as iron ore and steel, and avert price risks through forward futures transactions.

China should bring domestic energy and raw material prices in line with the international market as soon as possible, and make itself a centre of the global pricing system.

Chinese enterprises should also learn a lesson from their past practice of separate purchase and competing for resources with each other at the expense of higher importing prices. The government can also work out a co-ordination mechanism to join domestic buyers together to win favourable prices commensurate with the country's overall import volume.

China should learn from Japan in this regard. As a country which has to import every barrel of oil it uses, Japan has successfully controlled the energy price in the Asian market. Its leverage on the global oil price is far greater than ours.

Some domestic steel companies, including Bao Steel and Panzhihua Steel, recently co-ordinated their purchase of iron ore from foreign suppliers. This might be a good start of China's involvement in international price-making.

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