Government plans Food Adjustment Mechanism
13th September 2007

Webb-site.com has learned of a new HK Government plan to address public concerns about the rising cost of food in Hong Kong. Leading supermarkets have entered into a confidential Memorandum of Understanding with the Government in which future prices of raw meat, fruit, vegetables and other staples will be set annually under a "direct drive" mechanism, known as the FAM, or "Food Adjustment Mechanism", and will rise or fall in line with inflation, minus a productivity factor.

Leading supermarket chain Wellcome welcomed the move, saying that it at last gave them a "predictable, objective and transparent" price-setting mechanism for their goods, and avoided the messiness of price autonomy when prices were set in response to supply and demand. The retailers have agreed to absorb fluctuations in the cost of their merchandise, in line with the public interest. Within each year's overall FAM adjustment, the price of individual products such as cooking oil, rice and soy sauce will not vary by more than plus or minus 5% from the overall price adjustment.

A source familiar with the situation said that this was an extension of the "Government Leads, Market Facilitates" approach recently applied to its investment in HKEx and to the proposed merger of the MTR and KCR railway systems, and denied that the FAM represented intervention in the free market, saying "it wasn't free to start with. People have to pay for food, you know. It doesn't just grow on trees".

Stepping up plans to cater for interest from the Middle East and Indonesia, Financial Secretary John Mohammed Tsang added that there is huge potential for Islamic pork-free supermarkets in Hong Kong, and the Government would buy shares in Dairy Farm and Park 'n Shop owner Hutchison Whampoa in order to support the development of halal shops, since otherwise the companies would fail to recognise this potential on their own. He added "besides, pork is getting too expensive. We need to exclude it from the consumer price index, and Islamic shopping will help."

Looking further ahead, Mr Tsang justified the Government's share purchases with the possibility of share swaps or even mergers between the supermarket chains, and said "without the Government as a shareholder, how would the retailers know what was in their best interests"? He added that Government-led mergers were in line with its long-standing competition policy, saying "there's too much unhealthy competition, and our policy is to eliminate it. This will help the return on our investment portfolio."

It is understood that the Government will be looking at electricity next, where they already hold shares in Hongkong Electric and CLP through the Exchange Fund and are keen to preserve profits.

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