As China's inflationary pressure keeps mounting, policymakers are increasingly challenged on how to strike a balance between stabilizing prices and refraining from undue market intervention.

The National Development and Reform Commission (NDRC), the country's top pricing authority, recently issued a notice to warn against willful price intervention by local governments.

The warning is timely.

Since latest statistics show that the country's consumer price level rose 3.2 percent in the first half of the year, inflationary expectation has been growing considerably. Last week, 13 institutions predicated that China's consumer price index (CPI) in the third quarter would rise to a record high of 4.5 percent. Meanwhile, price hikes are observed in more and more businesses closely related to people's living.

To prevent upward inflationary pressure from spreading rapidly, it is tempting for local governments to step in. And some have done so.

It is indeed the responsibility of local governments to prevent extreme price fluctuations in the market that may bite too deep into the pockets of residents, especially those with low and middle income.

However, that does not mean the invisible hand of the market should be replaced by the administrative hand in determining the price level of any goods of mass demand. The new notice issued by the NDRC sends a clear message to local governments that the market should be allowed to play the major role in balancing supply and demand.

It requires local governments to refrain from directly intervening in the price of goods and services that are not subject to government control, except in cases of emergency.

Rising inflationary pressure certainly poses a sort of threat to the country's economic growth. Yet, a willful administrative hand that supplants the market in pricing goods or services regardless of their supply and demand will only be more undesirable. After all, the country's robust economic growth over the past three decades is largely driven by our market-oriented reforms.

A functioning market economic system is of long-term significance to the country's economic development. It should not be sacrificed for curing some temporary growth woes.

(China Daily July 31, 2007)