CONFIDENTIAL #
G.F. 326
- 3 -
mostly provincial authorities.
Overseeing the price
setting authorities at different levels was the State Administration of Commodity Prices, which was responsible for setting prices for materials and commodities 'in key economic sectors, approving prices set by various authorities and organizing the checking of prices.
4.
Government control of the price determination process was the primary cause of China's irrational price structure. Prices were irrational in the sense that they did not reflect the supply and demand conditions as market forces played no part in their determination. But in theory, the cost-plus formula for price determination should at least have reflected the average cost of
production, though the profit margins might vary. However, as Table 1 shows, profit margins varied widely across industries, with generally large margins for the processing and other manufacturing industries but extremely low margins for the raw materials sector. Apart from reflecting deliberate attempts to offer price incentives to certain industries, the large discrepancies in profit rates also revealed the problems involved in the
planning process.
5.
In the first place, excessive concern about price stability made the authorities very cautious about adjusting prices. For instance, the order to freeze prices issued in 1967 remained in force until 1979. Hence during this period there was no chance of getting rid of the irrationalities within the price structure.
6.
Inertia in the planning system and lack of coordination among planning agencies were other causes of price irrationalities. The rigid bureaucratic structure made adjustments to prices a very tedious process.
CONFIDENTIAL #