China published a formula this month for working out what a product ought to cost, so that selling it for less can be investigated. On Sunday the reason for the formula arrived. Shu Wei, a vice minister at the State Administration for Market Regulation, told a briefing in Beijing that regulators will carry out cost investigations and price inspections on companies competing through malicious low pricing, and will deal with them strictly under the law — a programme running to 2030, alongside an accelerated rewrite of the pricing statute.
Prohibiting a company from selling below cost sounds simple until somebody has to prove the cost. That is the part the September 11 notice handles. The National Development and Reform Commission and the market regulator issued a single methodology for calculating whether a manufacturer is selling beneath what production actually required, and the interesting clauses are the ones covering the awkward cases.
Regulators may adjust the calculation for a plant running well below the industry's average capacity utilisation. And where a company's own costs cannot be established, they may work from an industry average, adjusted downward. The notice named no industries.
That gap existed by design of nobody. Below-cost dumping has been against the rules in China for years; an NDRC official's explanation of the notice was that the law required accounting for individual and industry costs without ever saying how the accounting should be done. The same official described the price wars as disrupting normal business order and risking a situation where "bad money to drives out good." The word being used for this is involution — neijuan — firms cutting below cost to take share from each other until nobody makes anything. It is also the mechanism underneath China's deflation problem, which is why a market regulator's housekeeping is a macroeconomic event.
There is a household on the other end of this. Price wars are ruinous for the companies fighting them and pleasant for everyone buying, and in an economy where prices have been falling, the discount has been the only relief most shoppers were getting. A campaign that succeeds in stopping firms from underselling each other suggests a transfer running in one direction, out of the shopping basket and into the margin. That is the intended repair — profits restored, capacity rationalised, quality rewarded, by the regulator's own account of the goal. It is also a bill, and it is not paid by the companies.
The other thing to watch is where this ends up pointing. The pricing law being rewritten dates from 1998 and has never been revised; the draft extends into algorithmic pricing and technology-enabled price manipulation, and Sunday's briefing promised tighter oversight of platform data, algorithms and traffic rules. Somewhere ahead, a state calculation of what a good ought to cost meets software that reprices it several times a day.
A price used to be whatever the market last agreed on. In the sectors this covers, it is becoming a figure the state can check your working against.
Prohibiting a company from selling below cost sounds simple until somebody has to prove the cost.
