In another reminder of China’s "market access with socialist characteristics," the country’s National Reform and Development Commission on Friday levied a RMB2 million (US$307,000) fine on Unilever for publicizing planned price increases. China still very much likes to control consumer prices, particularly in FMCG, and the market is highly regulated. The reasons for this are not to do with inflation, but far more to do with the long-term view that China is maintaining price stability and is sustaining a relatively level playing field for all. In fact, inflation seems to be coming down.

China has long had market controls in place, ever since the revolution, where the hoarding of grains and other commodities to raise prices were considered capitalist tendencies and deemed as putting profit before the people. Such instigators were routinely executed in the early days of the revolution, and the sensitivity over consumer goods pricing and the expectations of Chinese consumers has long been a political issue. I recall, for example, some 12 to 15 years ago in China when foreign market research firms were routinely forbidden to conduct market surveys, especially in more rural areas. The Chinese government knew very well that asking less wealthy families questions such as "Do you have a refrigerator?" and "When would you like to buy a car?" would raise consumer expectations faster than the government could raise incomes to help meet them.

Likewise, advertising campaigns are routinely censored when deemed to raise the expectations of China’s rural population too far. Showing images of scantily clad models posing around a brand new sedan while spouting off information about cheap loans isn’t going to cut the mustard with a peasant farmer growing beetroot in Gansu. Instead, he’ll feel disenfranchised, and grow resentful. Social unrest usually follows, and the Unilever example has nothing to do with inflation or blaming its effects on foreign MNCs. Rather more, with the Communist party about to celebrate its 90th birthday in China this coming July, and the last thing the CCP wants to see are grumbles and restlessness over the prices of consumer goods.

Unilever made their comments over having to increase prices as a direct result of raw material costs increasing, which is not an unusual subject matter in the West. But in China, consumers reacted rather differently, and went out on mass buying sprees to hoard what they could, in some cases resulting in certain brands selling at a rate 100 times faster than normal. The potential social stigma with daily necessities being subject to price increases at a time when inflation is already causing problems for lower income families is not something the CCP want to see, especially when apparently instigated via media interviews (Unilever made their price rise comments to several Chinese journalists).

The reality in China is that price controls are a tool to be used by the government and the mere capitalist aims of a corporation’s bottom line is not a priority. Unilever’s response was fast and contrite, as the author knows full well is best when having angered government.

"As a company with a long term commitment to China, we accept the decision and continue to be sensitive to the local environment," Unilever said in an official statement.

That of course also means that Unilever will have to absorb the increased costs of raw materials instead of passing them onto the consumer. Bang goes their 2011 business plan for China, but they’re still in the game, and that’s what counts here. Otherwise, I can point to three lessons to be gleaned from all this: first, if you are selling FMCG or commodities in China, it pays to talk to the government before raising retail prices; secondly, be careful what you say about sales strategy and pricing to the media; and third, now would be a rather good time to be investing in raw material and commodity stocks.