By Alexandra Harney
SHANGHAI, July 16 (Reuters) - Behind China's twoinvestigations into irregular pricing of infant formula andpharmaceuticals announced this month is one powerful institutionand its struggle for relevance as Beijing attempts a transitionto a more consumption-led economy.
The investigations have entangled big foreign companiesincluding Danone SA, Nestle SA andGlaxoSmithKline Plc. But some analysts say there may besomething deeper at work - jockeying over the direction ofpolicy in the world's second largest economy in the years ahead.
The National Development and Reform Commission (NDRC),Beijing's economic superagency, sets policy for strategicindustries, approves big investments, mergers and acquisitions,and has the authority to influence prices for everything fromliquor to gasoline.
Its powers are so sweeping that it is often called the"little State Council".
But in recent months, as President Xi Jinping and Premier LiKeqiang have begun an attempt to steer China's economy away fromits reliance on state-led investment towards a moreconsumer-focused model, academics and even senior officials havebegun to publicly cast doubt on the NDRC's role.
While the NDRC has always had a price-setting role, itsdecision to launch high profile predatory pricing probes intoinfant formula and drugs now could be a bid by the commission toprove its usefulness as a regulator.
"On a fundamental level, the NDRC is scrambling to show thatit has something to contribute," says Barry Naughton, professorat the University of California, San Diego, and a specialist inChina's economy.
SHIFTING PRIORITIES
That the main economic policy body in the fastest-growingmajor economy over the past decade might feel the need to shoreup its position says much about the debate raging among Chinesepolicymakers. In key areas, the new leaders are trying to shiftChina's priorities in ways that represent a challenge to theNDRC's traditional dominance.
Evidence that dominance could be under threat includes thefact that Premier Li made the reduction of bureaucraticapprovals - one of the NDRC's main roles - a key plank of hisreform plan announced in March.
In May, Li also rejected a 40 trillion yuan ($6.5 trillion)urbanisation plan that the NDRC had proposed, sources familiarwith the matter told Reuters, although the commission deniesthis.
Xi and Li remain committed to urbanisation, but the push nowis "less about building stuff", says Arthur Kroeber, managingdirector of GaveKal Dragonomics Research, and more about helpingmigrants live "more fully-fledged urban lives".
Reducing bureaucratic red tape - such as the NDRC approvalsprocess - is another way the new administration would like toshrink the role of the state in the economy.
There are also concerns among academics about the NDRC as aninstitution. Founded in 1952 as the State Planning Commission,it is deeply rooted in China's command economy past, even as itcrafts policies for its mostly capitalist present.
Part of the debate is about whether, through its investmentapproval function, the NDRC is allocating resources asefficiently as possible, says Shi Lei, professor of economics atFudan University. Overcapacity plagues many industries in China.
With so much power concentrated in one institution,corruption is another worry - Liu Tienan, former NDRC vicechairman, is under investigation over allegations he took bribesto help a businessman defraud banks.
REGULATORY ROLE
The NDRC is no stranger to controversy. It has facedchallenges to its power before and has found ways to survive andeven increase its influence.
Indeed, this month's drugs and formula investigations couldwell be a sign that the NDRC is adapting to the new mood inBeijing by strengthening its role as a regulator.
Especially since the 2011 introduction of regulationsgoverning its role in implementing the 2008 Anti-Monopoly Law,the NDRC has been stepping up its investigations into pricingpractices.
In March, it imposed a 449 million yuan fine on two domesticliquor firms for setting minimum resale prices and a 10 millionyuan fine on eight real estate companies for misleadingcustomers and violating pricing regulations.
In January, it found six foreign LCD manufacturers guilty ofprice fixing and fined them 353 million yuan.
Few sectors pack the symbolic punch of infant formula, bothfor Chinese consumers and the government. Since 2008, whenmelamine in infant formula killed six babies and sickened300,000 others, the infant formula industry has epitomized thetrade-off between rapid economic growth and health and safety.
Driving down prices also supports Beijing's efforts to shiftthe economy away from a reliance on exports and investmenttoward a greater dependence on consumption. Drugs and infantformula are both commonly perceived as too expensive.
"Every time price reductions are made, it's mainly a publicrelations exercise," said Zhou Zhang, an analyst at ChinaMerchant Securities. "The NDRC trumpets how big reductions willbe, but when it comes down to it, prices only fall a bit. TheNDRC's main consideration is public relations."
The NDRC did not respond to a request for comment. Oneperson with knowledge of the NDRC investigations said that theywere being conducted at an unusually rapid pace.
The infant formula investigation also appears to cover notcollusion among companies, but how the retail prices for theseproducts are set - an issue where China's laws differ from thosein other countries, including the United States.
All of the infant formula companies targeted have reducedprices in China since the NDRC announced its investigation.
That might be good for consumers in the short term, butScott Kennedy, director of the Research Center for ChinesePolitics & Business at Indiana University, questioned the NDRC'scredentials as a consumer watchdog, given its central role inChina's export- and investment-led expansion of the past twodecades.
"This is an economy built by, for and of industry," he said.
Glaxosmithkline (GSK)