Regulators to probe underpricing

On Thursday, the macro planner (NDRC) and the market regulator (SAMR) announced plans to investigate illegal pricing practices.

Some context: Ferocious competition across much of China’s industrial base has led firms to sell products below cost.

Thursday’s notice instructs industry associations to engage in average cost surveys to help identify – and discourage – unsustainable pricing practices.

NDRC and SAMR will also carry out cost and price inspections, enforcing fair pricing rules by:

• Issuing reminders and warnings to companies flouting the rules
• Punishing illegal pricing behaviour with (unspecified) penalties

Get smart: This move is controversial – and won’t necessarily improve market conditions.

• It’s technically challenging (not to mention intrusive) to calculate a company’s true production costs, since it’s almost impossible to incorporate indirect costs – such as long-term research and development efforts – into marginal cost calculations.
• Getting the calculations wrong – and forcing a company to adopt an unprofitable pricing strategy – will further undermine already-shaky industrial profits.

The bigger picture: By focusing on pricing, regulators risk overlooking the root cause of “involution-style” competition – the persistent demand-supply mismatch.