Acting on its pledge to let the market play a bigger role, made at a key policy summit in November 2013, China has been removing state-sanctioned price controls in several sectors over the past year, the latest being price caps on medicine.

Last week, in a move welcomed by drug firms and health experts, the country's top economic planning agency said it will stop the decades-old practice of drug price controls from June 1 in the hopes that a market-driven system will keep costs in check.

Others also cheered the move as another step in the right direction amid China's broader reform goal - outlined at the Communist Party's Third Plenum - of letting the market play a "decisive role" through less government intervention and by encouraging competition. Advertisement

China had previously defined markets as having a "basic" role in resource allocation.

"The removal of price caps is significant as an indicator of Beijing's commitment to wider economic and systemic reforms," said Professor Cao Heping from Peking University's School of Economics.

"This is because each price reform, even in the area of drugs, requires innovation and a slew of changes to the existing system beforehand."

Removing such caps is likely to lead to freer market access and a more level playing field, Mr Chen Long, of consultancy Gavekal Dragonomics, added.

The deregulation of medicine prices comes on the back of Beijing's pledges and measures to relax its price grip on a slew of sectors in the past year, including telecommunication services, tobacco, ports and railways, air transport, natural gas and electricity.

Last year, for example, telecommunications firms were allowed to independently decide tariffs for their services.

The government also announced plans for a gradual increase in household tap water prices and said it would raise natural gas prices for residential consumers by the end of this year in a bid to conserve energy.

But whether price reforms result in higher or lower prices for Chinese consumers will depend on the industry because it will be market forces that will now dictate them, experts say.

The deregulation of drug prices, for instance, is expected to encourage both foreign and local firms to offer better and more innovative drugs in the world's second largest pharmaceutical market, worth an estimated 655 billion yuan (S$143 billion).

Previous price controls had reportedly led to shortages of some medicine and to some firms sacrificing drug quality in a bid to keep production costs low in the past.

While many drug firms might look to increase profits by raising prices, they ultimately compete on price and will now be forced to differentiate themselves through branding, experts add. Advertisement

"Price of mainstream and commonly-used drugs might dip due to competition, while innovative medicine might see higher prices instead as they require more financial investment," said Prof Cao.

DBS Bank economist Lily Lo said deregulation is typically followed by lower prices due to increased competition that follows, but resources are an area where prices might rise.

"Resource prices are determined not only by local competitive dynamics, but also by international economic and market conditions," she added.

Under the country's old growth model, price controls kept resource input costs low, which propped up inefficient industries and supported the export boom.

This cheap energy fuelled excessive power consumption and led to severe pollution problems. But China is taking steps to address this with, for example, changes to tap water and natural gas prices.

Still, the road ahead in seeing through the reform remains long.

Experts say price reform is difficult and could take years as it depends on complementary changes to an industry's market and ownership structures.

Ms Lo added that price reform in sectors such as oil - where the retail prices of petrol and diesel are controlled - are needed as they do not fully reflect international market forces now.

But Mr Chen thinks this reform is unlikely.

"The sector is seen as of strategic importance and the government will still want to retain control on prices there."

Source: Asia One