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China Prices
Determination of Prices
Until the reform period of the late 1970s and 1980s, the prices
of most commodities were set by government agencies and changed
infrequently. Because prices did not change when production costs
or demand for a commodity altered, they often failed to reflect the
true values of goods, causing many kinds of goods to be
misallocated and producing a price system that the Chinese
government itself referred to as "irrational."
The best way to generate the accurate prices required for
economic efficiency is through the process of supply and demand,
and government policy in the 1980s increasingly advocated the use
of prices that were "mutually agreed upon by buyer and seller,"
that is, determined through the market. The prices of products in
the farm produce free markets were determined by supply and demand,
and in the summer of 1985 the state store prices of all food items
except grain also were allowed to float in response to market
conditions. Prices of most goods produced by private and
collectively owned enterprises in both rural and urban areas
generally were free to float, as were the prices of many items that
state-owned enterprises produced outside the plan. Prices of most
major goods produced by state-owned enterprises, however, along
with the grain purchased from farmers by state commercial
departments for retail sales in the cities, still were set or
restricted by government agencies and still were not sufficiently
accurate.
In 1987 the price structure in China was chaotic. Some prices
were determined in the market through the forces of supply and
demand, others were set by government agencies, and still others
were produced by procedures that were not clearly defined. In many
cases, there was more than one price for the same commodity,
depending on how it was exchanged, the kind of unit that produced
it, or who the buyer was. While the government was not pleased with
this situation, it was committed to continued price reform. It was
reluctant, however, to release the remaining fixed prices because
of potential political and economic disruption. Sudden
unpredictable price changes would leave consumers unable to
continue buying some goods; some previously profitable enterprises
under the old price structure would begin to take losses, and
others would abruptly become very wealthy.
Data as of July 1987
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